You own shares of a stock. You believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?
A) Buy a call.
B) Sell a call.
C) Buy a put.
D) Sell a put.
E) None of these.

Question

Quizplus · Accepted Answer

Buying a put option is a common strategy to hedge against the risk of a decline in the stock price. It gives the owner the right, but not the obligation, to sell the underlying stock at a specified price (strike price) before the option expires. If the stock price falls, the put option increases in value, offsetting the loss in the stock's value.

You Own Shares of a Stock