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

Question

Quizplus · Accepted Answer

Buying S&P 500 Index put options can protect against a decline in the market value of a portfolio by allowing the owner to sell the index at a predetermined price, thus hedging against losses. Selling S&P 500 Index call options generates income but also obligates the seller to deliver the index at a predetermined price if the option is exercised, which can be a form of income if the seller believes the market will not rise above the strike price.

One Could Temporarily Protect Profits on a Highly Diversified Portfolio