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?

Question

Quizplus · Accepted Answer

Buying a put option gives the buyer the right to sell the underlying stock at a predetermined price (strike price) before the expiration date. If the stock price declines, the put option will increase in value, offsetting the loss in the stock. Therefore, buying a put option creates a hedge against a decline in the stock price while allowing the investor to benefit from the potential upside. Buying a call option would increase in value if the stock price increases, but it does not protect against a decline in the stock price. Selling a call or put option would create an obligation for the seller and does not create a hedge for the buyer.

You Own Shares of a Stock