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Options positions can be used to synthetically create portfolio positions without actually owning a stock. One such position is a synthetic long stock position. That
- Options positions can be used to synthetically create portfolio positions without actually owning a stock. One such position is a synthetic long stock position. That is, an options position that mimics the payoff to owning a stock without owning it. This approximates ownership but at much lower cost than actually buying 100 shares of the stock. The position is constructed by buying a call on the stock and selling a put on the stock at the same strike price.
- Exxon common is currently trading at $50 per share. A January call with strike price of $50 is trading at $5 and a January $50 put is trading at $4 share.
- Compare the payoff on the call, the put, the combination, and the long stock position of 100 shares if the prices at expiration are $40, $50, and $60 per share. Remember the contracts are for 100 shares each.
- Draw a payoff profile for each.
- Are the synthetic and long stock positions comparable in terms of payoff?
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