Final answer:
The investor with the greatest potential risk if the price of XYZ goes up is the one who is short puts. They are obligated to buy the stock at the strike price, which could be substantially higher than the market price. Other options have different risks and benefits depending on whether the investor is long or short on calls or puts.
Step-by-step explanation:
The investor with the greatest potential risk if the price of XYZ goes up is the one who is short puts (option D). When an investor is short puts, they have sold put options, which gives the buyer the right, but not the obligation, to sell the stock at a specified price (strike price) before a specified date (expiration date). If the stock price rises significantly above the strike price, the put options become worthless, and the short put position incurs no additional loss beyond the premium received when the puts were sold. However, if the stock price falls below the strike price, the investor who is short puts is obligated to buy the stock at the strike price, which could be substantially higher than the market price, resulting in a potentially significant loss.
Long puts, option B, would give the investor the right to sell stock at the strike price, and the increase in stock price would result in a loss limited to the amount paid for the puts (the premium). An investor who is long calls (option C) expects the stock price to rise and would benefit from an increase in stock price. Lastly, an investor who is short calls (option A) would have an obligation to deliver the stock at the strike price if the call options are exercised, which could result in a loss if the market price is higher than the strike price, but this scenario occurs when the price rises, not when it falls.