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SIE practice questionmediumLong/Short positions

A customer who sells a put option is exposed to which primary risk?

  1. AStock remains unchanged, incurring a loss
  2. BStock rises above strike price, requiring sale at a loss
  3. CStock declines below strike price, requiring purchase of declining asset✓ Correct answer
  4. DOption premium increases, causing margin call
Explanation

Why C — Stock declines below strike price, requiring purchase of declining asset

The principal risk is having to buy stock below market value if it falls below strike. B applies to calls, C is unlikely as the premium is kept, and D misstates the typical risk.

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