Market participants can obtain downside protection using options at a cost equal to the option price, but preserve upside potential (reduced by the option price).

Question

Quizplus · Accepted Answer

This statement is true. Options can be used to provide downside protection by setting a floor for how much an investor can lose, but also allow for the possibility of gains if the market moves in the investor's favor. The cost of the option is the premium paid for the contract, which reduces the overall potential profit but ensures a certain level of protection from losses.

Market Participants Can Obtain Downside Protection Using Options at a Cost