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1) Myles Houck holds 600 shares of Lubbock Gas and Light. He purchased stock many years ago at $48.50, and shares are now trading at= $75. Myles is concerned that market is beginning to soften. He does not wish to sell stock, but he would like to be able to protect profit he's made. He makes a decision to hedge his position by purchasing six puts on Lubbock G&L. The three-month puts carry a strike price of $75 and are presently trading at= $2.50.

a) How much profit or loss will Myles create on this deal if price of G&L does drop to $60 a share by expiration date on puts?

b) How would he do if stock kept going up in price and reached $90 share by expiration date?

c) What do you see as major benefits of using puts as hedge vehicles?

d) Would Myles have been better off using in-the-money puts—i.e., puts with an= $85 strike price that are trading at= $10.50? How about using out-of-the-money puts--say, those with= $70 strike price, trading at $1.00? Describe.

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Basic Finance, Finance

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