You just bought 100 shares of MSFT and wish to hedge it -- you want to limit your loss. You decide to buy a put option.
1. What put option do you buy and why (there's no right answer here, but pick a put with a strike about 10% less than the current price of MSFT). Graph the payout of the put option.
2. Now graph your payout of your total position - the stock and the put option -- from the current market price.
3. You now decide you don't want to pay money for the put, so you are going to finance it by selling a call option. Which call option will you sell? Graph the payout of that option.
4. Now graph the payout of the stock, short call, and long put option all together.
5. Now - you decide to buy a put option, and sell a call option where both strike prices are as close as possible to the current price of MSFT. Graph the combined position. Why does it look like it does?