Suppose that Wal-Mart stock is currently selling for $53 per share. Suppose that you are unwilling to pay that price. Given that a put option with a strike price of $50 trades at $2 per share, construct a strategy whereby the stock could effectively be purchased for less than $50. What is the disadvantage of this strategy? If Wal-Mart stock is currently selling for $53 per share and three month put options are selling for $4 with an exercise price of $50:
a. If you purchase 300 shares of stock and 3 put contracts (300 individual options) find the breakeven price on this portfolio.
b. Draw the profit and payoff diagrams to this strategy as a function of the stock price in three months.