How is this correct?

How I interpret this answer is that the short stock has to be returned. You borrow at 40 and sell it and then wait. You want the stock price to fall in order to make money.

If the stock falls to 35, then the short put will be exercised. You will be obligated to buy at 35. From there, you own (in theory) the same amount you borrow and now you return. $5 profit per share + the premium on the put sale.

I read your comment to another person about unlimited risk and I’d agree with you. If the stock goes up, you would want to have a call option to protect from that potential loss scenario. That isn’t an option though.

What you’re looking for here is a way to cover your short position. Answer B provides you with it

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