You own shares of a stock and believe the stock price will increase in the future.However,you realize the stock price could decline and want to hedge that risk.Which one of the following option positions should you take to create the desired hedge?
A)buy a call
B)sell a call
C)buy a put
D)sell a put

Question

Quizplus · Accepted Answer

Buying a put option gives the holder the right, but not the obligation, to sell the underlying asset at a predetermined price during a specified period. If the stock price declines, the put option will increase in value and offset the loss in the stock position. This strategy allows the investor to limit their potential losses while still benefiting from any potential gains. Selling a call or put option exposes the investor to unlimited potential losses and buying a call option does not provide downside protection.

You Own Shares of a Stock and Believe the Stock