Explain how to create a short synthetic put. You must prove your answer. please explain clearly

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Expert Solution

A synthetic position is the use of option derivatives to emulate the payoff of another position.

A short put (Selling put option) is when a writer writes a put option to earn premium expecting that the stock price will increase the put option will expire worthless. Example: You write a put option for 3 months at 50 USD (strike price) for a stock worth 48 usd. This means that you have an obligation to buy the stock at 50 after 3 months . If the price rises above 50, say the price reaches 60 after 3 months, then option will expire worthless since the option buyer will not exercise it.

A synthetic short put can be created by combining (buying) a long stock position and short call (selling call option) of the same security. It is named as synthetic short put as the payoff potential is similar to a short put.

The maximum profit will be the amount of premium received. (Same as in short put).This will occur if price of stock at expiration is greater than strike price. The gain on long stock position if price increases will be offset by loss on short call.

jeff jeffy answered 1 year ago

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