Question

If your directional view is that stock prices are going to fall, you should

(a) Sell stock now.

(b) Sell call options.

(c) Buy put options.

(d) All of the above are profitable strategies.

Answer 1

(a) If one sells stocks now and stock prices fall in the future, one can purchase the sold shares at a lower price in the future, thereby earning a profit,

(b) Selling a call option would benefit the seller in terms of the option premium (price) gained immediately. Under the terms of a sold call option, the seller has the obligation to sell the underlying stock at the option's strike price. However, if stock prices fall in the future, the option buyer will not exercise the option as the buyer can purchase the stock from the open market at the lower future price instead of exercising the option and buying it at the higher (than future stock price) strike price.

(c) Buying a put option provides the buyer with a right to sell the underlying stock at the option's fixed strike price, irrespective of the actual stock price in the future. Hence, if stock prices fall in the future, the put buyer can exercise the put and sell his/her stock at the agreed upon put option strike price instead of the lower future price.

(d) This is the correct option as all the aforementioned strategies will result in a profit if stock prices fall.