Question

Suppose you buy 100 shares of Google stock which has a current price of $1,265.13 a share. You want to ensure that you do not lose more than $200 a share. Which of the following option strategies would allow you to do this?

	A.	A covered call
	B.	A naked call
	C.	A protective put
	D.	You cannot ensure that you will not have losses with stocks

Answer 1

The correct answer is option "C" - A Protective put

Because the protective put strategy does create a limit for maximum loss as any losses in the long stock position under the strike price of the put option will be compensated by profits in the option and hence is the correct option.

Option A - A covered call is a financial market transaction in which the seller of call options have the corresponding amount of the underlying instrument that is shares of a stock or other securities and hence is the incorrect option.

Option B - A naked call is an options strategy in which an investor writes call options on the open market without owning the underlying security and hence is the incorrect option.

Option D is also incorrect because you need to ensure that the loss in future should be minimum and for that you need to take a protective put for the minimum loss upto a limit of amount.and hence is the incorrect option.