An investor holds 500 shares of XYZ Corp. and is concerned about a potential short-term decline in the stock's price, but wants to retain ownership. Which option strategy would be most appropriate to protect against this downside risk?

Question: An investor holds 500 shares of XYZ Corp. and is concerned about a potential short-term decline in the stock's price, but wants to retain ownership. Which option strategy would be most appropriate to protect against this downside risk?

Answer options:

• Selling 5 covered calls on XYZ Corp. ✅ Buying 5 protective puts on XYZ Corp.
• Selling 5 naked puts on XYZ Corp.
• Buying 5 call options on XYZ Corp.

Correct answer: Buying 5 protective puts on XYZ Corp.

Explanation: A protective put strategy involves buying put options on a stock already owned. This provides downside protection below the strike price while allowing the investor to profit if the stock price rises.