If an investor believes that the price of a stock will fall, he might

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If the investor believes that the price of a stock will fall, the best choice would be to buy a put option on the stock. This would give the investor the right, but not the obligation, to sell the stock at a predetermined price (strike price) before the expiration date. If the price of the stock falls below the strike price, the investor can exercise the option and sell the stock at a higher price than the market price, making a profit. Buying a call option (Choice A) would not be appropriate as it would give the investor the right to buy the stock at a predetermined price, which would not be profitable if the price of the stock falls. Writing a put option (Choice B) would be appropriate if the investor believed that the price of the stock would remain stable or rise, but not if it was expected to fall. Buying a put option gives the investor the right, but not the obligation, to sell the stock at a fixed price (the strike price) until the option expires. If the stock price falls below the strike price, the put option becomes more valuable, allowing the investor to sell the stock at a higher price than the market value. This would result in a profit for the investor. Therefore, buying a put option is the appropriate position to take if the investor believes that the price of the stock will fall.

If an Investor Believes That the Price of a Stock