Question

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. You don't want to sell the stock just now, because you think there's a good probability of further gains. You do want to protect yourself from the possibility of significant price declines and losing your gains. Your gains could be protected by placing a _________.

Answer 1

You could protect yourself from the possibility of significant price decline by buying put options for your stock. A put option gives the buyer of the put option the right to sell the stock at a particular price till a particular date. So for example you could buy a put option which gives you the right to sell your stock for $65 1 year from now. Assume you buy the put option for $1 and the price of the stock goes back to $50 in a year. Because you have the put option you can sell the stock for $65 because of the put option, and lose only $1 instead of $15. Where as if the stock price increases to $75, then you can sell the stock at $75, and you will make a profit of $24 (75-50-1)

Step-by-step explanation: