Assume you believe that Microsoft (MSFT) stock is trading well above its fundamental value. As a result, you believe that Microsoft stock is ready for a correction and likely to fall over the short-term. You, therefore, enter into a short position by selling 100 shares of Microsoft stock at $35 per share. Assume that Microsoft pays a 4 percent dividend on its stock.
Compute the profit or loss if Microsoft stock falls to $30 a share.
Compute the profit or loss if the Microsoft stock rises to $40 a share.