How can options be used to synthesize a short position in the underlying commodity?
A) A short put option + long call option at the same strike price
B) A long put option + short call option at the same strike price
C) A short put option + short call option at the same strike price
D) A long put option + long call option at the same strike price

Question

Quizplus · Accepted Answer

A long put option gives the holder the right to sell the underlying commodity at a certain strike price, while a short call option obligates the writer to sell the underlying commodity at the same strike price. By combining a long put option with a short call option at the same strike price, an investor can replicate the payoff profile of a short position in the underlying commodity. This strategy is known as a synthetic short position.

How Can Options Be Used to Synthesize a Short Position