You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit, but you are troubled about the short-run behavior of the stock market. An effective action on your part would be to
A) purchase a put.
B) purchase a call.
C) purchase an index option.
D) utilize a bearish spread.
E) utilize a bullish spread.

Question

Quizplus · Accepted Answer

Purchasing a put option provides the buyer with the right but not an obligation to sell the underlying stock at a specific price (strike price) on or before a specific expiration date. In this case, if the stock market behaves adversely, the put option can be exercised to sell the stock at the agreed-upon strike price, thereby protecting the buyer from a further decline in the stock price. This strategy is also known as hedging the stock position. Therefore, A) Purchase a put is the best choice in this scenario.

You Own a Stock That Has Risen from $10 Per