Question

Strategies [15 Points] Suppose Jordy purchases 1900 shares of Cloudflare, Inc. stock (NET) for $43.05 and at the same time he also buys 19 put options that has a strike price of $35. The put option is currently selling for $12.95. (a) What is the option strategy that Jordy has decided to employ? What would be the reason Jordy would want to employ this strategy?

Answer 1

Jordy has employed the protective put strategy by buying Cloudflare, Inc. stock and put options. This strategy helps limit potential losses in case the stock price declines.

Step-by-step explanation:

Jordy has decided to employ a strategy known as a protective put strategy. This strategy involves buying shares of a stock and at the same time purchasing put options to protect against potential losses. In this case, Jordy purchased 1900 shares of Cloudflare, Inc. stock (NET) for $43.05 and also bought 19 put options with a strike price of $35, which were selling for $12.95 each.

The reason Jordy would want to employ this strategy is to limit his potential losses if the price of the stock were to decline. The put options give him the right to sell the stock at the strike price of $35, even if the actual market price drops below that. By buying the put options, Jordy is protecting himself from significant losses if the stock price were to fall.