E. Option Trading Strategies  (continued)

• b. Buying Put options to hedge against a stock price decline
  • Investor holds IBM and has already taken a paper profit. Investor believes IBM will go higher and would like to participate in upside without risking a loss on paper profit. Buys a put. If price goes up, the potential is only diminished by the cost of the put, whereas the paper profits are protected by the put and decreased only by the put price.

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