If an investor buys a put option with a strike price of 40, which of the following is TRUE?
A) The investor has a right to buy the underlying stock at the strike price and is bullish.B) The investor has an obligation to sell the underlying stock at the strike price and is bearish.C) The investor has an obligation to buy the underlying stock at the strike price and is bullish.D) The investor has a right to sell the underlying stock at the strike price and is bearish.
The investor has a right to sell the underlying stock at the strike price and is bearish.
Buyers of contracts have rights, sellers of contracts have obligations. Buying a put contract gives the right to sell the underlying stock at the strike price. With a strike price of 40, the investor wants the price of the stock to fall (bearish). They can then exercise the right; selling the stock at 40 and then buying at a price less than 40.