You anticipate that volatility will increase sharply and the stock price will fall. Select the most profitable of the following portfolios to hold, given your views:

Question

Quizplus · Accepted Answer

If you anticipate that volatility will increase sharply and the stock price will fall, the most profitable portfolio to hold is a short stock and long puts. This is because shorting the stock will benefit from the anticipated price fall, while buying long puts will give you the right to sell the stock at a higher price, resulting in a profit. This combination will also limit your potential losses if the stock price were to rise instead of fall. The other options all include long calls, which would not be profitable in a falling market.

You Anticipate That Volatility Will Increase Sharply and the Stock