Which of the following describes a protective put?

A) A long put option on a stock plus a long position in the stock.

B) A long put option on a stock plus a short position in the stock.

C) A short put option on a stock plus a short call option on the stock.

D) A short put option on a stock plus a long position in the stock.

Question

Physics

Rodrigo Choi

19 August, 08:02

Which of the following describes a protective put?

A) A long put option on a stock plus a long position in the stock.

B) A long put option on a stock plus a short position in the stock.

C) A short put option on a stock plus a short call option on the stock.

D) A short put option on a stock plus a long position in the stock.

+4

Answers (1)

Know the Answer?

Neil Gilmore · Answer 1

A long put option on a stock plus a long position in the stock describes a protective put.

Option a

Explanation:

A protective put position can be defined by buying or owning stock and buying put options on a share-for-share basis. It is a "risk-management strategy" that uses the options contracts which investors employ to guard themselves against the loss of owning a stock or asset. In this strategy, traders believe that the price of the asset may decline in the future.

For example: Suppose 50 shares are purchased (or owned) and one put is purchased. So, when the stock price declines, the purchased put protects the strike price.