Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?
I. short the stock
II. buy a call at 50
III. write a call at 55
IV. buy a put at 45

Question

Quizplus · Accepted Answer

If you believe the stock price will decline, shorting the stock (I) allows you to profit from the decrease in price. Writing a call at 55 (III) means you're selling someone the right to buy the stock from you at $55, which becomes profitable if the stock price falls below this level, as the option will likely expire worthless or be unexercised. Buying a put at 45 (IV) gives you the right to sell the stock at $45, which becomes profitable if the stock falls below this price, allowing you to sell it at a higher price than the market offers.