Reference no: EM132364389

Suppose you own 100 shares of Dell Inc. stock. Today it is trading at $15 per share, but you're worried Michael Dell might retire again, causing the price to go down. How would you protect yourself against his retirement, assuming you don't want to sell the shares today?

The intention is not to sell the shares now and to hold them so they can be sold at a later date. In this case, the suitable option will be to purchase a put option. A put option will give right and not an obligation to sell the shares at the strike price. If the share price is below $15, then the put option can be exercised to make a profit and sell the stock at $15. Otherwise, the put option can be allowed to lapse and shares can be sold at higher market price at the future date. Thus, purchasing put option will provide protection against the risk of falling stock price.