Synthetic Short Position

CFA Level II Derivatives
#1

To create a synthetic short position in a stock, an investor can buy:

A) both a call option on the stock and a put option on the stock.
B) a put option on the stock and sell a call option on the stock.
C) a call option on the stock and sell a put option on the stock.

The correct is answer is B with explanation Buying a put option and writing a call option results in a payoff pattern similar to that of a short position in the underlying stock.

I managed to guess the answer correctly for this question. However, I always get confused and lost in the concepts when face such questions. Any tips to get things straight? Thanks in advance.

#2

c + X = p + S (basic put-call parity)

-S = p - c- X (short underlyting equals long put, short call, short bond)

Or draw a payoff graph of a long put and short call. :bulb:

#3

When you short a stock, you profit from a price decrease (long put) and suffer from a price increase (short call).

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