Financial Modelling 2557A/B Lecture Notes - Lecture 6: Downside Risk
Document Summary
Long stock + long put = long call + long bond. Limited loss as stock price drops - unlimited gains as stock price increases. Higher payoff than just call because more expensive to create. Short stock + long call = long put + short bond. Limited loss as stock price raises - limited gains as price drops. Lower payoff than just put, but there is proceed when shorting stock. Short call + long stock = short put + long bond. Short put + short stock = short call + short bond. Naked writing: when option seller does not have position in stock. Long call + short put = long stock + short bond(matured with k) Long put + short call = synthetic short forward. Short put + long call = synthetic long forward. Bet that underlying stock will appreciate in value with lower costs: achieve by giving up portion in profit. Limit upside profit potential and downside risk.