Maxine is a portfolio manager who 15 years ago, purchased 100 shares of Never2Tacky, a social media corporation for Aspirations Global Technology…

Hedging is a risk management strategy used to reduce or offset the risk of adverse price movements in an asset. Maxine owns 100 shares of Never2Tacky and is concerned that the price will fall. By purchasing a put option, she acquires the right to sell her shares at a guaranteed price ($95), known as the exercise or strike price. This action establishes a price floor, protecting her investment from a significant loss if the market value drops below $95. This specific strategy, where an investor buys a put option to protect a long stock position, is known as a "protective put."

A. Speculating involves taking on risk to profit from price changes, often without owning the underlying asset. Maxine is reducing risk on an existing position.
B. Modern portfolio theory is a broad framework for constructing diversified portfolios, not a specific transaction to manage the risk of a single stock.
C. This is an active management decision to protect a specific holding, which is the opposite of passive management (e.g., tracking an index).

1. IFSE Institute, Canadian Investment Funds Course (CIFC), Part 2, Module 9, Section 3.2 "Hedging with Options". The course material explicitly describes using put options to protect against a decline in the value of a stock holding as a hedging strategy.

2. Hull, J. C. (2017). Options, Futures, and Other Derivatives (10th ed.). Pearson. Chapter 11, "Trading Strategies Involving Options," pp. 255-257. This academic text details the "protective put" strategy as a primary example of hedging a long position in a stock.