19 lines
1.2 KiB
Plaintext
19 lines
1.2 KiB
Plaintext
Synthetic Stock
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Not only can synthetic calls and puts be derived by manipulation of put-call
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parity, but synthetic positions for the other security in the equation—stock
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—can be derived, as well. By isolating stock on one side of the equation,
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the formula becomes
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After accounting for interest and dividends, buying a call and selling a put
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of the same strike and time to expiration creates the equivalent of a long
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stock position. This is called a synthetic stock position, or a combo. After
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accounting for the basis, the equation looks conceptually like this:
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This is easy to appreciate when put-call parity is written out as it is here.
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It begins to make even more sense when considering at-expiration diagrams
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and the greeks.
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Exhibit 6.6 illustrates a long stock position compared with a long call
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combined with a short put position.
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EXHIBIT 6.6 Long stock vs. long call + short put.
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A quick glance at these two strategies demonstrates that they are the
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same, but think about why. Consider the synthetic stock position if both
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options are held until expiration. The long call gives the trader the right to
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buy the stock at the strike price. The short put gives the trader the obligation |