You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is ________ than if you buy at-the-money puts and your maximum gain is ________.
A) greater; lower
B) greater; greater
C) lower; greater
D) lower; lower

Question

Quizplus · Accepted Answer

Purchasing out-of-the-money puts involves a lower premium than at-the-money puts, allowing for a greater maximum gain due to the lower cost. However, because they are out-of-the-money, the stock price must fall further before the puts are in-the-money, leading to a potentially greater maximum loss compared to at-the-money puts, which provide immediate protection against a drop in stock price.

You Own a Stock Portfolio Worth $50,000