A speculator believes that the share price of XYZ Corp., currently trading at $50, will fall significantly in the next three months. Which of the following options strategies would allow them to profit if this prediction is correct, while limiting their potential downside risk?

Question: A speculator believes that the share price of XYZ Corp., currently trading at $50, will fall significantly in the next three months. Which of the following options strategies would allow them to profit if this prediction is correct, while limiting their potential downside risk?

Answer options: ✅ Buying a put option with a strike price of $50.

• Selling a covered call option with a strike price of $50.
• Buying a call option with a strike price of $55.
• Selling a naked put option with a strike price of $45.

Correct answer: Buying a put option with a strike price of $50.

Explanation: Buying a put option provides the right to sell the underlying asset at a specified strike price. If the share price falls below the strike price, the put option increases in value, allowing the holder to profit. The maximum loss is limited to the premium paid.