Which combination of positions will 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 collar strategy which limits the downside risk. In case the stock price falls, the put option provides the right to sell the stock at the strike price, limiting the loss. Buying a call option or selling a put option, as in choices A and D, only provide limited protection against downside risk. Selling the stock, as in choice B, does not protect the owner against downside risk.

Which Combination of Positions Will Protect the Owner from Downside