A synthetic short sale is created with a long put and a short call with the same strike price and expiration dates. Bank of America stock is currently trading at $21.71 per share. A May $25 call is trading at $2.75 and a May $25 put is currently trading at $2.25.
Solution:
Payoff of short sell = Selling price - spot price
Payoff of synthetic short = Payoff of short call + payoff of long put
Payoff of synthetic short = MIN(Strike price- Spot price,0) + Premium received + MAX (Strike price - Spot price) - Premium Paid
Monetary outlay will be
For short sale = 21.71 *100 = 2171
For synthetic short = Net premium (Premium received from short call - premium paid in long put ) *100 = (+2.75 - 2.25) *100 = 50
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