You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?
A)buying a call
B)selling a call
C)buying a put
D)selling a put

Question

Quizplus · Accepted Answer

Buying a put option gives you the right to sell the stock at a specified price, known as the strike price. If the stock price decreases, the put option becomes more valuable, allowing you to sell the stock at the higher strike price and make a profit. Selling a call option, buying a call option, and selling a put option all have profit profiles that require the stock price to increase, which is not consistent with your belief that the price will decline.

You Believe the Price of a Stock Is Going to Decline