An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes. However,he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?

Question

Quizplus · Accepted Answer

The investor has 100 shares of Amazon stock with an unrealized gain. By purchasing a put option with a strike price of $75, he has the right to sell the stock at $75, limiting his potential losses in case the stock price drops. However, he paid a premium of $300 for the put option.

At expiration, the stock is at $68, which means the put option is in the money. The investor can exercise the put option and sell the 100 shares at $75, resulting in a gain of ($75 - $68) x 100 = $700. However, he paid a premium of $300 for the put option, resulting in a net gain of $700 - $300 = $400.

Therefore, the net gain or loss on the entire stock/option portfolio is a loss of $400.

Note that the unrealized gains on the stock are irrelevant in this case, as the investor did not express any desire to realize them.

An Investor Has Unrealized Gains in 100 Shares of Amazin