Which one of the following is the primary purpose of a protective put?
A)profit from an expected future increase in the underlying stock's value
B)guarantee a higher return than is possible from just owning the underlying security
C)offset the risk associated with a decrease in the value of the underlying asset
D)receipt of the option premium
E)increase in potential rate of return due to increase in risk

Question

Quizplus · Accepted Answer

The primary purpose of a protective put is to offset the risk associated with a decrease in the value of the underlying asset. It is a hedging strategy used by investors to protect their long positions in securities by purchasing put options. This allows them to sell the underlying asset at a predetermined strike price, which limits their potential losses in case the asset's value decreases. A protective put does not aim to generate profits from an expected future increase in the stock's value or provide higher returns than owning the underlying security. Option premiums are received by the seller of the option, not the buyer. A protective put may increase the potential rate of return, but only because it allows investors to take more risks in their investment strategies without exposing themselves to downside risk.

Which One of the Following Is the Primary Purpose of a Protective