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Which of the following best describes the payoff profile of buying a stock and a...

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Finance

  1. Which of the following best describes the payoff profile of buying a stock and a put option on that stock?

Select one:

  1. If the stock increases in value, you keep all of the upside and let the option expire without exercising it. If the stock falls in value, your decline is protected only up to the strike price. If the stock price falls below the strike price, your investment's value will decline as well.
  2. If the stock increases in value, your upside is limited to the strike price of the option. If the stock falls in value, the value of your investment could go to zero.
  3. If the stock increases in value, you keep all of the upside and let the option expire without exercising it. If the stock falls in value, your decline in value is limited to the strike price of the put option because you will exercise the option and sell the stock at the strike price.
  4. If the stock increases in value, your upside is limited to the strike price of the option. If the stock falls in value, your decline is also limited to the strike price of the put option because you will exercise the option and sell the stock at the strike price.

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