Buying the stock and the put option on the stock provides the same payoff as:
A) investing the present value of the exercise price in T-bills and buying the call option
B) on the stock
C) short selling the stock and buying a call option on the stock
D) writing (selling) a put option and buying a call option on the stock
E) none of above

Question

Quizplus · Accepted Answer

Buying the stock and the put option on the stock provides the same payoff as investing the present value of the exercise price in T-bills and buying the call option on the stock. This is known as a synthetic call option. It is achieved by buying the underlying asset (stock) and purchasing a put option which provides downside protection, just like a call option. In contrast, short selling the stock and buying a call option on the stock is known as a synthetic long option, and writing a put option and buying a call option is known as a synthetic long stock position.

Buying the Stock and the Put Option on the Stock