Expects the market to be lower in the future

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Reference no: EM131447398

An investor who is “bearish” (i.e., expects “the market” to be lower in the future) can Sell individual stocks short; buy a put option, or; can write a call option. These three choices:

a. Are quite different. Since shorting stocks or call options will be profitable if the market goes down, but buying the put option will result in a loss.

b. Are pretty much the same. After adjusting for the differing degrees of leverage, the risk/reward characteristics are the same.

c. Are quite different. Risk and likely reward are different even if the stock sold short is the same stock underlying asset for the options.

d. Are quite different. Options are derivative securities, and therefore have no relationship to stock market prices.

e. Are pretty much the same, since risk and reward are limited by the fact that the stock can only go to zero.

Reference no: EM131447398

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