One could temporarily protect profits on a highly diversified portfolio of large company stocks by
A) selling S&P 500 Index put options.
B) buying S&P 500 Index put options.
C) buying S&P 500 Index call options.
D) selling S&P 500 Index call options.

Question

Quizplus · Accepted Answer

Buying S&P 500 Index put options gives the holder the right to sell the underlying stocks at a predetermined price within a set time frame. Therefore, if the market experiences a downturn, the put option will increase in value, offsetting any potential losses on the stocks in the portfolio. This strategy is known as a protective put.

One Could Temporarily Protect Profits on a Highly Diversified Portfolio