Question

A) Assume you have identified a stock you think will go down in price in the next year. Briefly discuss (in one or two sentences) two potential trading strategies you could implement that will allow you to profit if indeed the stock price declines.

B) What if this is a stock you already own? What are two things you could do to protect yourself against a price decline? Briefly (1 sentence each) discuss each.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Two trading strategies:

1. Buy Put options for the stock and if the stock declines, the buyer of the put option will profit.

2. Sell/Short futures of the stock, if stock declines, the seller of Futures will profit.

If you already own the stock:

Then it's better to

1. a. write a call option (As you already own the stock, you can take the huge risk of writing a call). and

2. b. Buy put options from the proceeds of the call.

Or

2. Sell/Short futures of the stock to hedge yourself.