Investco owned 100,000 shares of Exxon and accounted for this stock as a trading security. On 12/31/15, when the value of the Exxon stock was $50 per share, Investco sold a call to a third party giving the third party the right to buy Investco’s Exxon stock at a price of $60 per share. Simultanously, Investco used the proceeds from the Call to buy a put right to sell its stock to a third party for $40 per share.
At January 31, 2016, the value of Exxon stock had increased to $58 per share.
Required:
a. In January, 2016, should Investco record a gain or a loss on its call position. Clearly explain why to demonstrate that you understand and are not guessing. No credit without a clear explanation.
b. In January 2016, should Investco record a gain or loss on its put position. Clearly explain why to demonstrate that you understand are are not guessing. No credit without a clear explanation.