On May 21, 2020, an investor owns 100 Apple shares. As indicated in Table 1.3, the share price is about \($316\) and a December put option with a strike price of \($290\) costs \($21.30\).

The investor is comparing two alternatives to limit downside risk. The first involves buying one December put option contract with a strike price of \($290\). The second involves instructing a broker to sell the 100 shares as soon as Apple’s price reaches \($290\). Discuss the advantages and disadvantages of the two strategies.

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Table 1.3 Prices of put options on Apple, May 21, 2020; stock price: bid $316.23, ask $316.50 (Source: CBOE). September 2020 Strike price June 2020 December 2020 ($) Bid Ask Bid Ask Bid Ask 290 3.00 3.30 12.70 13.65 20.05 21.30. 300 4.80 5.20 15.85 16.85 23.60 24.90 310 7.15 7.85 19.75 20.50 28.00 28.95 320 11.25 12.05 24.05 24.80 32.45 33.35 330 17.10 17.85 28.75 29.85 37.45 38.40 340 24.40 25.45 34.45 35.65 42.95 44.05