Question

Which one of the following choices is a synthetic short call? M a. Short stock, short put M b. Long stock, short call M c. Short stock, long put M d. Long stock, long put M e. Short stock, long call

Answer 1

Synthetic Short Call = Short Stock + Short Put

All combinations of synthetics can be created by the following formula:

S + P - C = 0

Stock + Put – Call = 0

4. Synthetic Short Call = Short Stock + Short Put

-C = - S - P

When you short a call option, you are exposed to limited profits, unlimited losses and the premium on the call options decay to your advantage. The short stock contributes the limited downside profits (all the way to $0 so technically unlimited profits to downside) and the short put options limit that profit to the premium decay of the put options while offsetting part of the loss to upside.