Which option position would provide the best downside protection for Mrs. Smith who is concerned about a temporary decrease in the price of DEF stock?

Buying a DEF put option is the most effective strategy for Mrs. Smith to protect against a temporary decline in the price of DEF stock. A put option gives the holder the right to sell the underlying stock at a predetermined price, known as the strike price, before the option's expiration date. This means that if DEF stock were to decline in value, Mrs. Smith could exercise her put option to sell DEF at the strike price, thereby limiting her losses from the decline in stock price.

This strategy provides a safety net, allowing her to effectively hedge her investment. If the stock price drops significantly, the value of the put option would typically increase, providing a counterbalance to her losses on the stock itself. In situations where she anticipates a temporary decrease in the stock's value, this approach offers downside protection and the opportunity to limit potential losses.

Holding the stock without any options exposes Mrs. Smith fully to market risks without any protective measures. Selling a call option might generate some income, but it doesn't offer protection against declines in the stock price. Buying another call option would not address her downside concerns, as it is a speculative move that anticipates stock price increases rather than protection against decreases.