Question

Stock A is selling for $20 dollars and have a $1 quarterly dividend. After six months the price is lower.

Which of the following answers will provide you with the best return?

A. Put
B. Call
C. Common Stock
D. Buy the debt
E. Do Nothing

Answer 1

Answer-

The correct Option is A. A Put option helps when there is decline in price.

By buying a put the  the holder of the stock has the right but not the obligation to sell a specified quantity of a security at a specified strike price within a fixed period of time until expiration.

For illustration when an individual holds the 100 stocks whose price is $ 5 / share and he buts a put option on stock. If after six months the price declines to $ 3 / share the individual can sell the stocks at $ 5 instead of $ 3 to the broker. Therefore the individual has gained $ 5 x100 - $ 3 x 100 = $ 200 by buying a put option.
The other Options are incorect

The Option B is Call is incorrect as It helps when there is increase in price of stock.
Option C is incorrect as common stock helps when there is increase in price.
Option D is incorrect as buying the debt will not give good return in this case.