Question

What is a synthetic put option? How does this differ from a put option premium found by put- call parity?

Answer 1

As synthetic put is an option strategy where short stock position is combined with long call option. Usually the stock increases are protected by "At the money" Call option. Hence, as stock fall this position gains as normally a put would do but when stock increases this postion is covered by call mimicking the restricted loss in a put option.

Generally the put option premium cost under put call parity should be equal it its synthetic equivalent, but this may sometimes differ due to trading costs and dividends.

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