Consider the following compound options written on an underlying stock. Which one decreases in value when the stock falls in price?
A) A put on a call.
B) A call on a put.
C) A put on a put.
D) None of the above.

Question

Quizplus · Accepted Answer

A put on a put is the only compound option listed that decreases in value when the stock falls in price. In this scenario, the owner of the put option has the right to sell the underlying stock at a predetermined strike price. However, if the stock falls in price, it becomes less valuable to sell at the strike price, and therefore the option decreases in value. The other options, a put on a call and a call on a put, increase in value when the stock falls in price. And as none of the above applies in D, we cannot choose it as an answer.

Consider the Following Compound Options Written on an Underlying Stock