Reference no: EM132751798

Myles Houck holds 500 shares of Lubbock Gas and Light. He bought the stock several years ago at $47.67?, and the shares are now trading at $75.50. Myles is concerned that the market is beginning to soften. He? doesn't want to sell the? stock, but he would like to be able to protect the profit? he's made. He decides to hedge his position by buying 5 puts on Lubbock? G&L. The? 3-month puts carry a strike price of $75.50 and are currently trading at $2.74.

Problem a. How much profit or loss will Myles make on this deal if the price of Lubbock? G&L does indeed? drop, to $60.50 a? share, by the expiration date on the? puts?

Problem b. How would he do if the stock kept going up in price and reached $90.50 a share by the expiration? date?

Problem c. What do you see as the major advantages of using puts as hedge? vehicles?

Problem d. Would Myles have been better off using? in-the-money puts-that ?is, puts with an $86.00 strike price that are trading at $10.51?? How about using? out-of-the-money puts-?say, those with a $70.00 strike? price, trading at $1.10?? Explain