Suppose you own a stock that is currently trading for $65. You purchased it for $60. You would like to wait a while before you sell it because you think there is a good chance the stock will increase further.
1. How can you structure a transaction that will insure that you can sell the stock for $65, even if it falls below that price, say, to $60 or $55.
2. If that option costs you $5 and the stock reaches $75, at which time you sell it, what was your dollar profit? Did you exercise the option? Why or why not? Was buying the option a "waste of money"?
3. If the price of the stock falls to $7, what is your dollar profit or loss?