Question

Which of the following is equivalent to a synthetic put?

            a.         a long stock and a short put position

            b.         a long put and a long stock position

            c.          a long put and a short risk-free bond position

            d.         a long stock and a short risk-free bond position

            e.         none of the above

Answer 1

The correct answer is b. (a long put and a long stock position). Usually a synthetic put would mean shorting stock along with longing a call. However, it has the same meaning as longing a put option and along with that longing the stock in cash market. In this strategy (b), the investor will benefit unlimited rise potential of stock and he will be hedged with any downfall in the stock with the long position on put option of the same stock.