Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?
A)Above the exercise price if the stock price rises and below the exercise price if it falls
B)Equal to the exercise price regardless of the stock price
C)Equal to zero regardless of the stock price
D)Below the exercise price if the stock price rises and above if it falls

Question

Quizplus · Accepted Answer

By simultaneously buying a put option and selling a call option with the same exercise price, the investor has created a synthetic long position. The value of this investment on the final exercise date will be equal to the exercise price regardless of the stock price. This is because if the stock price rises, the call option will be exercised and the investor will sell the stock for the exercise price. If the stock price falls, the put option will be exercised and the investor will buy the stock for the exercise price. In either case, the investor will end up with the stock at the exercise price, which is the same value as the investment.

Suppose an Investor Buys One Share of Stock and a Put