3. You are forming an investment strategy.

You think there is a great upward potential in the stock market and would like to invest in the stocks. However, you are not able to afford substantial stock market losses and so are concerned on the risk of a market collapse, which you think is not impossible.

Choice 1: Your financial advisor suggests a protective put position: buy both shares in a stock index fund (currently $900 per share) and put options on those shares with 3-month expiration and exercise price of $780.

Choice 2: Your friend suggests you instead buy a 3-month call option on the index fund with exercise price $840 and buy 3-month T-Bill with face value $840.

(1). Compare these two choices in the following tables.

Choice 1:

	If S<780	If 780<=S<=840	If S>840
Payoff:
Stock	S	S	S
Put
Total

Choice 2:

	If S<780	If 780<=S<=840	If S>840
Payoff:
T-Bill	840	840	840
Call
Total

(2). Use the above information; please represent the payoffs of each strategy in one diagram with the stock price as the X-axis and payoff as the Y-axis.