ParT 2: ValuaTION, rISk aNd reTurN
in Figure 8.6, simply by combining one put option, with a strike price of $75, and one share. Both of
these portfolios provide a minimum payoff in one year of $75, with additional upside potential if the
share price rises above $75.FIGure 8.5 PAYOFF FROM ONE LONG SHARE AND ONE LONG PUT (X = $40)
The graph shows the payoff on a protective put, a portfolio that combines a long position in the underlying share (upper-left) and a long position in a
put option (upper-right) on that share, with a strike price of $40. If the share price increases above $40, the investor’s portfolio goes up. However, if the
share price falls below $40, the put option gives the investor the right to sell the share at $40, essentially putting a floor on the portfolio’s value.long share payoff0 20 40 60 80
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80
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Share price on expiration date ($)Long share payoff ($)0 20 40 60 80
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Share price on expiration date ($)Long share payoff ($)long put payoff20
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0 20 40 60 80
Share price on expiration date ($)protective put payoffProtective put payoff ($)