Which statement best describes hedging with options in wealth management?

Which statement best describes hedging with options in wealth management?

• A. Hedging with options cannot offset risk.
• B. Hedging with options is a valid risk management technique that uses calls or puts to offset risk.
• C. Hedging with options eliminates all downside risk.
• D. Hedging with options guarantees profits.

Answer: (C)

Hedging with options is a risk-management technique that uses options contracts to offset potential losses from an underlying position. For example, buying a protective put on a stock you own can limit downside if the stock falls, because the put increases in value as the stock drops. This approach reduces risk, but it does not remove it entirely: you pay a premium for the hedge, and if markets move favorably or if the hedge isn’t perfectly sized, you can still face losses or miss some upside. So the best description is that hedging with options uses calls or puts to offset risk, recognizing that it lowers risk without guaranteeing profit or perfectly eliminating downside.

Hedging with options is a risk-management technique that uses options contracts to offset potential losses from an underlying position. For example, buying a protective put on a stock you own can limit downside if the stock falls, because the put increases in value as the stock drops. This approach reduces risk, but it does not remove it entirely: you pay a premium for the hedge, and if markets move favorably or if the hedge isn’t perfectly sized, you can still face losses or miss some upside. So the best description is that hedging with options uses calls or puts to offset risk, recognizing that it lowers risk without guaranteeing profit or perfectly eliminating downside.