Assume that you have just sold a stock for a loss at a price of $75 for tax purposes. You still wish to maintain exposure to the sold stock. Suppose that you buy a call with a strike price of $70 and a price of $6.75. Calculate the effective price paid to repurchase the stock if the price after 35 days is $65.
A) $71.75
B) $76.75
C) $58.25
D) $81.75
E) $85.25

Question

Quizplus · Accepted Answer

The effective price paid to repurchase the stock can be calculated as follows:

Option premium paid = $6.75 
Strike price of the call = $70 
Total cost of call option = $6.75 + $70 = $76.75

However, since the investor has sold the stock for a loss at a price of $75, the loss can be offset against the gains from the call option.

Profit from call option = Price after 35 days - Strike price - Premium paid 
= $65 - $70 - $6.75 
= -$11.75

The negative profit from call option can be used to offset the loss from selling the stock.

Effective price paid to repurchase the stock = Sale price of stock - Profit from call option 
= $75 - (-$11.75) 
= $75 + $11.75 
= $86.75

Therefore, the effective price paid to repurchase the stock is $86.75, which is closest to answer choice A.

Assume That You Have Just Sold a Stock for a Loss