Lecture Notes: Converting a BuyRight into a Synthetic Put

Introduction

• Speaker: Andrew Jovoni from Option Pit
• Topic: Converting a BuyRight into a Synthetic Put
• Motivation: Clarify misconceptions on the topic found online

Key Concepts

Put-Call Parity

• Definition: Understanding option prices relative to the stock price
• Formula:
  • Call Price - Put Price = Stock Price (S) - Strike Price (K) + Cost of Carry (r) - Dividend (D)
  • Simplified: C - P = S - K + r - D
• Components:
  • Call Price (C)
  • Put Price (P)
  • Stock Price (S)
  • Strike Price (K)
  • Cost of Carry (r)
  • Dividend (D)

Synthetic Stock with Options

• Creating a synthetic stock to determine the underlying price based on options

Converting a BuyRight

• BuyRight Definition: Buying stock and selling a call
• Synthetic Put Formula:
  • Put (P) = Call Price (C) + Strike Price (K) - Stock Price (S)
  • Derived from modifying the put-call parity equation

Example

• Stock: Palantir
• Stock Price: $22.88
• Call Price: $1.55 for May 24 strike
• Synthetic Put Price Calculation:
  • $1.55 + $24 - $22.88 = $2.67
• Market Put Price: $2.57
• Conclusion: Synthetic put priced slightly better due to cost of carry

Key Takeaways

• Cost of carry affects synthetic pricing
• Selling an out-of-the-money call or creating a BuyRight is equivalent to selling an in-the-money put
• Recommendation: For more information, visit optionpit.com and sign up for classes

Closing

• Encouragement to visit optionpit.com for more educational content
• End of lecture