Rick owns stock in a retailer that he believes is highly undervalued. Rick expec

Question

Rick owns stock in a retailer that he believes is highly undervalued. Rick expects that the stock will increase in value nicely over the long term. He is concerned, however, that the entire retail industry may fall out of favor with investors as some larger companies report falling sales. There are no options traded on his stock, but Rick would like to hedge against his fears about retail. He locates a symbol RTH, which is a Retail HOLDRS. Can Rick hedge against the risk he is concerned with by using RTH? Using options?

(Select the best choice below.)

A.To hedge the risk, Rick can either short RTH or use put options on RTH.

B.To hedge the risk, Rick can either take a long position in RTH or use call options on RTH.

C.To hedge the risk, Rick can either short RTH or use call options on RTH.

D.To hedge the risk, Rick can either take a long position in RTH or use put options on RTH.

Explanation / Answer

To hedge the risk, Rick can either short RTH or use put options on RTH. Though Rick expects the stock price to increase, but his another concern says that the retail industry may fall out in the coming times. So it would be either better to short RTH now or opt for a pre-decided sell price (as anticipation is that with industry fall out prices will just fall like anything) at a later stage which means going for put options

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