You currently own 200 shares of Amazon stock. If you purchase options on this stock to guard against future declines in the price of the stock you are implementing which one of the following?
A)covered call
B)naked call
C)protective put
D)bear spread
E)straddle

Question

You currently own 200 shares of Amazon stock. If you purchase options on this stock to guard against future declines in the price of the stock you are implementing which one of the following?
A)covered call
B)naked call
C)protective put
D)bear spread
E)straddle

Quizplus · Accepted Answer

Purchasing options to guard against future declines in the price of a stock is known as hedging. Protective put, which involves buying a put option on the stock, is a hedging strategy that allows the investor to protect their downside risk while still participating in any potential upside. Covered call involves selling a call option on a stock that you own, naked call involves selling a call option on a stock that you don't own, bear spread involves buying and selling two call options at different strike prices, and straddle involves buying a call option and a put option at the same strike price. None of these strategies involve hedging against future declines in the price of a stock. Therefore, the best choice is C, protective put.

You Currently Own 200 Shares of Amazon Stock