If you expect a stock's price to fall, you may
1) buy a call option
2) write a call option
3) buy a put option
4) write a put option
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question

If you expect a stock's price to fall, you may
1) buy a call option
2) write a call option
3) buy a put option
4) write a put option
A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Quizplus · Accepted Answer

If you expect a stock's price to fall, the best choice is to buy a put option. A put option gives the holder the right, but not the obligation, to sell the underlying asset (in this case, the stock) at a specified price (strike price) within a specified period of time. Writing a put option (option 4) exposes you to unlimited risk if the stock price falls significantly, so it is not a good choice. Buying a call option (option 1) is not appropriate if you expect the stock price to fall, as a call option gives the holder the right, but not the obligation, to buy the underlying asset at a specified price (strike price) within a specified period of time. Writing a call option (option 2) exposes you to unlimited risk if the stock price rises significantly, so it is not a good choice either. Therefore, the best choice is to buy a put option (option 3).

If You Expect a Stock's Price to Fall, You May