Suppose you buy a put in order to protect yourself from a drop in the price of a security you own.  Suppose also in this case the exercise price (E) in the put is lower than the currency price of the security you have bought the put against (i.e., the put is "out of the money").  

Answer these two questions:

1. What will the "profit profile" or "kinked profit line" for the combined security plus the put?  (Draw carefully, and explain.)
2. The pattern you draw in (a) will resemble the profit profile for a naked call.  Which of the two patterns (the stock plus the put, or the naked call) will have the higher profit?  Explain (carefully) why.

Answer rating: 100% (QA)

A The profit profile for the combined security plus the put option will be a kinked line To draw thi... View the full answer