1 If I expect an decrease in a stocks price and want to make

1. If I expect an decrease in a stock\'s price and want to make money, I can:

buy the stock

short sell the stock

hold the stock

none

2. If I expect an increase in the value of a stock, to make money, I can:

buy a put option on that stock

short sell the stock

sell a call option on that stock

buy a call option on that stock

PLEASE answer BOTH and explain your answer

thanks in advance

Solution

1. Option c short selling the stock.
Short selling is used to hedge risk when the stock price is expected to fall. Short selling involves borrowing shares and selling the shares at current rate which are higher and purchasing back the same number of shares when prices fall. Hence the investor makes a profit while returning back the same number of shares to the lender.


2. Option d buy a call option on that stock
Buying a call option helps in hedging against price rise. The strike price at the current scenario will be low because current market price will be low. Since the price of stock increases the buying call option will allow the buyer to buy at strike price which will be lower than future price. So the effective purchase price of share will be less. The investor can then sell it at higher rate (price increases). Hence, the profit = (Future price - strike price)* no of shares

Best of Luck. God Bless