Which combination is referred to as a protective put? Assume all sales and purchases refer to ABC stock and its option contract.
A)Buying 100 shares of stock and writing one put option contract
B)Selling a put option contract and buying an offsetting call option contract
C)Buying 300 shares of stock and selling three call option contracts
D)Buying a put option contract and buying 100 shares of stock
E)Buying a put option contract and selling a call option contract with the same strike price and expiration date

Question

Quizplus · Accepted Answer

A protective put involves buying a put option contract and buying shares of stock. The put option provides downside protection while the stock position provides upside potential. Option combination A involves writing a put option, which exposes the investor to unlimited downside risk. Option combination B involves selling a put option, which also exposes the investor to downside risk. Option combination C involves selling call options, which limits potential upside for the investor. Option combination E involves selling a call option, which exposes the investor to unlimited upside risk. Option combination D involves buying a put option and buying shares of stock, which is the correct combination for a protective put.

Which Combination Is Referred to as a Protective Put? Assume