SIE Exam Question 298: Answer and Explanation

Question: 298

An investor is long 1000 shares of OnNet.com at $30 per share. To gain the maximum protection he should:

• A. Buy 10 OnNet June 30 puts.
• B. Sell 10 OnNet June 30 calls.
• C. Buy 10 OnNet June 30 calls.
• D. Sell 10 OnNet June 30 puts.

Correct Answer: A

Explanation:

A: Buying puts will give the investor the most protection from a fall in the stock price. The investor will have set the minimum sales price for the stock as the strike price of the put.