Reference no: EM131627465

Question: Assume you have a sizable gain on 200 shares of stock that you bought 2 years ago for $22 per share and that is now (December 15) selling for $50 per share. Given a justannounced tax rate cut, effective next calendar year, you want to delay realizing the gain until next year, but you are concerned that the stock's price might decline in the interim. To defer the tax liability to next year, you are considering either using a put hedge or selling deep-in-the-money call options.

a. Contact a stockbroker and obtain the approximate cost of implementing each of these strategies.

b. Compare and contrast the brokerage costs associated with these strategies. Which strategy is cheaper in terms of these costs?

c. What, if any, impact should the brokerage costs have on the selection of the better strategy? (Be sure to measure these costs on a per-share basis.)

d. For the cheaper strategy, by approximately how much will the brokerage costs reduce the unrealized gain on the stock?