Because the put option buyer gains when the price of the underlying stock index declines, purchasing a ________ will offset any adverse movements in the portfolio's value due to a ________ in the stock market.

Question

Quizplus · Accepted Answer

As stated in the question, the put option buyer gains when the price of the underlying stock index declines. Therefore, purchasing a put option will offset any adverse movements in the portfolio's value due to a decline in the stock market. Choice B (call option) is incorrect because a call option would not offset adverse movements in the portfolio's value caused by a decline in the stock market. Choice C (put option; rise) is incorrect because it is the opposite scenario of what is described in the question.

Because the Put Option Buyer Gains When the Price of the Underlying