Question

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

a. Writing an uncovered call option
b. Writing an uncovered put option
c. Buying a call option
d. Buying a put option

Answer 1

b. Writing an uncovered put option

Step-by-step explanation:

Buying a put option: usually do no require meeting the locate requirement for short sales, requires a smaller capital commitment and it has a lower loss potential.

Writing an uncovered put option comprises of countless real/potential losses as the stock price rises.

A writer of a call option usually prefer the value of the underlying asset to decrease, and a buyer of a put option will want the value of the underlying asset to decrease. Buying a put has a lower dollar-loss potential.