You own shares of a stock and 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) No option position will create the desired hedge.

Question

Quizplus · Accepted Answer

Buying a put option gives the owner the right to sell the underlying stock at a predetermined price (strike price) within a certain period of time (expiration date). If the stock price decreases, the put option will increase in value, offsetting the loss in the stock position. Therefore, buying a put option is a suitable choice to hedge against the downside risk.

You Own Shares of a Stock and Believe the Stock