What option position provides the best protection for a short seller concerned about a temporary price increase?

The most effective strategy for a short seller facing the possibility of a temporary price increase is to purchase a call option. By taking a long position in a call option, the short seller gains the right to buy the underlying stock at a predetermined price, known as the strike price. If the stock price rises above the strike price, the call option can be exercised, allowing the seller to cover their short position at that strike price, thereby limiting potential losses resulting from the price increase.

This approach serves as a hedge against the risk of rising prices, as the call option has the potential to offset losses from the short position. The value of the call option would increase in a rising market, providing a financial buffer to the short seller.

In contrast, other options do not serve the same protective purpose. For instance, holding stock outright or engaging in put options would not offer the same level of protection from sudden price increases, while a short call could lead to uncovered losses if prices spike. Therefore, buying the call option is the most strategic move for ensuring protection against potential adverse market movements.