Which of the following statements is correct for an investor who has purchased "portfolio insurance" by owning the stock and buying a put option on the stock?
A) The investor profits when the stock price declines.
B) Maximum profitability occurs when stock price equals strike price.
C) Value per share can decline no further than the strike price less the value of the option premium.
D) The option will certainly be exercised.

Question

Quizplus · Accepted Answer

For an investor who has purchased "portfolio insurance" by owning the stock and buying a put option on the stock, the value per share can decline no further than the strike price less the value of the option premium. This is because the put option provides the investor with the right to sell the stock at the strike price, which limits the downside risk. However, the investor would only profit if the stock price declines below the strike price, so statement A is incorrect. Statement B is also incorrect because maximum profitability would occur if the stock price is lower than the strike price by an amount greater than the option premium. Statement D cannot be determined as there are different factors that determine whether an option will be exercised, such as the current stock price and time remaining until expiration.

Which of the Following Statements Is Correct for an Investor