Why Did Grey Co. Purchase a Put Option on Cherry Co. Stock?

Explanation:

Grey Co.'s Reasoning for Purchasing a Put Option: Grey Co. decided to purchase a put option on the stock of Cherry Co. because they believe that although the current market price of the Cherry stock has increased, there is a possibility that the price might decrease in the future. In financial markets, a put option is a type of derivative contract that gives the holder the right, but not the obligation, to sell the underlying asset (in this case, Cherry stock) at a specified strike price within a specified period of time.

Protecting Against Price Decline: By purchasing a put option on Cherry stock, Grey Co. is essentially hedging against the risk of a potential decline in the stock price. If the price of Cherry stock were to decrease below the strike price specified in the put option, Grey Co. can exercise the option and sell the stock at the higher strike price, thus limiting their losses.

Alternative Scenarios: If Grey Co. believed that the price of Cherry stock would continue to increase, there would be no need to purchase a put option. In that case, it would be more advantageous for Grey to hold on to the stock or even consider buying call options to profit from the anticipated price increase. Similarly, if Grey believed that the stock price was going to increase after a decrease, they would be more inclined to purchase call options rather than put options.

Conclusion: In this scenario, Grey Co. made the strategic decision to purchase a put option on Cherry stock to protect themselves against the potential downside risk of a price decline, despite the stock's current increase. By utilizing a put option, Grey Co. can mitigate losses and manage their overall risk exposure in the market.