Which one of the following statements is correct for an investor who has purchased portfolio insurance by owning a stock and buying a put option on that stock?
A) The investor profits when the stock price declines.
B) Maximum profitability occurs when the stock price equals the 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

Portfolio insurance through owning a stock and buying a put option limits the potential downside risk. The put option provides the right to sell the stock at the strike price, so the value per share cannot decline below the strike price less the cost of the option premium. The investor is not necessarily looking to profit from a decline in the stock price, but rather to limit potential losses. Maximum profitability occurs when the stock price exceeds the strike price, as the put option will expire worthless in that scenario. The option may or may not be exercised depending on market conditions and the investor's objectives.

Which One of the Following Statements Is Correct for an Investor