Which combination of positions will tend to protect the owner from downside risk?
A) Buy the stock and buy a call option
B) Sell the stock and buy a call option
C) Buy the stock and buy a put option
D)Buy the stock and sell a put option

Question

Quizplus · Accepted Answer

Buying the stock and buying a put option creates a protective put strategy where the put option acts as insurance against a decrease in the stock's price. If the stock's price falls, the put option can be exercised to sell the stock at the strike price, thereby limiting the downside risk. Selling the stock or selling a put option increases the investor's downside risk. Buying a call option can potentially limit the investor's upside potential, but does not necessarily protect against downside risk.

Which Combination of Positions Will Tend to Protect the Owner