The seller of a put option is transferring the risk:
A)Of a price decrease of the stock to the buyer of the option.
B)Of a price increase of the stock to the buyer of the option.
C)This statement is incorrect since options do not transfer risk.
D)This statement is incorrect since only sellers of call options are transferring risk.

Question

Quizplus · Accepted Answer

The seller of a put option is obligated to buy the underlying stock at a predetermined price (the strike price) if the buyer chooses to exercise the option. Therefore, if the stock price decreases, the seller is at risk for having to purchase the stock at a higher price than the market value. By selling the put option, the seller is transferring this risk to the buyer of the option.

The Seller of a Put Option Is Transferring the Risk