Series 7 practice questionmediumOptions — Hedging with Puts
A portfolio manager holds a large position in technology stocks and is concerned about a short-term market decline. Which strategy would best hedge this risk?
- AWrite covered calls on the portfolio
- BWrite put options on a technology index
- CBuy call options on a technology index
- DBuy put options on a technology index✓ Correct answer
Explanation
Why D — Buy put options on a technology index
Buying put options on a technology index provides downside protection for the portfolio. If the sector declines, the puts increase in value, offsetting losses in the portfolio. This is more efficient than hedging individual stocks and directly protects against the market risk the manager fears.
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