Series 7 practice questionmediumOptions — Protective Put vs Covered Call
Compared to a covered call strategy, a protective put strategy provides:
- AAdditional income and limited upside
- BLimited downside protection and unlimited upside potential✓ Correct answer
- CNo cost and limited downside protection
- DAdditional income and unlimited upside potential
Explanation
Why B — Limited downside protection and unlimited upside potential
A protective put limits downside loss (the put sets a floor price) while preserving unlimited upside potential on the stock. In contrast, a covered call generates income but caps upside. The protective put costs money (the premium paid), while the covered call generates income. They serve different investor objectives.
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