Compare the pros and cons of buying a put option

Reference no: EM131305258

In late April 2010, Apple's stock was selling for more than $260 per share. The following appeared in a column in the Wall Street Journal, listing potential problems facing Apple that might cause the price of the firm's stock to decline: Some of these are issues that could erupt into problems quickly.

Others, if they do emerge, would take more time. But if you're a nervous Apple investor, what are your alternatives? Sure you could sell some stock and take your profits. But if you don't want to get off this train quite yet, here's another idea: You could buy some insurance using "put" options.

a. How does buying a put option provide insurance against a fall in the price of a stock?

b. Compare the pros and cons of buying a put option versus selling a stock if you are worried that the price of the stock might decline.

Reference no: EM131305258

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