Question

Assume Alpha Dog Inc. is a publicly traded stock that does not pay

any dividends. Is it possible to build a portfolio that will behave exactly like a European put option on Alpha Dog Inc. without actually buying the put option? How?
Make a table to illustrate how the put and the portfolio both create the same payoff at the expiry date

Answer 1

A Typical way to replicate the Put Option is by Seilling the Stock and simlutaneously Buying a Call Option at the same strike as the Put.

Payoff is As follows.

Assume Stock Price = 100

Strike Price =100

Call and Put Option Premium = 5

So below we will see how this replication will produce similar payoff

Scenario 1	Share price falls to 90 at expiration	Stock Price Increases to 110
Case 1- PUT OPTION
Payoff from Put option	10	0
Premium paid for Put Option	-5	-5
Total Income	5	-5
CASE 2 - Short Stock and Long Call
Payoff from Call Option	0	10
Call Option Premium	-5	-5
Stock Short Payoff	10	-10
Total Income	5	-5

So we can see How the payoff for this scenario is same. So in order to replicate a Long Put we can Short the Stock and Buy the Call Option