Final answer:
To close a short position in a December put option on shares of Heartless Enterprises Inc., you should buy a December put option with the same strike price and expiration date. This is the direct method to offset your initial trade and close the position correctly.
Step-by-step explanation:
If you have a short position in the December put option on the shares of Heartless Enterprises Inc. with a strike price of $40, and the current market price is $30, you are in a position where the market is moving against you since the value of the put option is likely increasing as the share price falls below the strike price. To close your position, you would need to do the opposite of your initial trade, which is to buy back the same put option to close out your short position. Therefore, the correct action would be option iii, buy a December put option with the same strike price and expiration date. This will offset your short position, and you will no longer have an obligation related to the put option. Exercising the option is not applicable here because you are the seller of the option, not the holder. Buying a call option would not close your existing put option position and is therefore not the right course of action.