Explanation:
A long put option with the strike price of $45 is the most suitable option for Annie. A put option gives the holder the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is known as the strike price. In this case, the strike price is $45. If Annie anticipates that the price of the ABC Inc. stock will fall below $45 due to the introduction of new regulations, she can protect her investment by buying a put option. If the stock price does fall, she can exercise her option and sell her shares at the strike price of $45, thereby limiting her losses or even profiting from the decline.
Q.727 Emmy Annie, a finance student at the University of Kennesaw, regularly invests her extra income in stocks and derivatives. She owns stocks of ABC Inc., a cleaning company, which are currently trading at $45. She believes the stock will trade below $45 if new regulations on cleaning companies are introduced next month. She is interested in entering an option position that gives her the right to sell her stocks at $45. If the price of the stock goes below $45, suggest the most appropriate option position for Annie.
A
A long call option with the strike price of $45.
B
A short call option with the strike price of $45.
C
A Long put option with the strike price of $45.
D
A short put option with the strike price of $45.
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