How to Turn a Call Option into a Put

Options are tools that investors use to speculative and hedge their financial positions. Basically an option is a contract that guarantees a price for the holder over a certain period of time. The option-seller has the obligation buy or sell at that price if the buyer so chooses. Sometimes markets change force adjustments in your positions. There are ways to create synthetic positions that can save you transaction costs. Read on to learn more.

Instructions

1. Learn how an option works. A call is a contract that guarantees a purchase price for the owner, who profits if the stock price goes up. A put is a contract that guarantees a sale price. A put owner profits if a stock price falls. You can't make a call option a put, but you can create a situation that has the same outcome, called a synthetic put.

2. Derive the formula for creating a synthetic put. Buying a call and selling a put has approximately the same result as buying a stock directly. If you rearrange that equality you can derive that owning a call and selling the stock short creates a synthetic put.

3. Understand how it works. If you own a put, you profit if the underlying stock falls below the strike price. However, if the sock price rises you only lose the premium you paid for the option. A call owner, on the other hand, benefits from a stock price going up. If you own a call and then sell the stock short for the same price your downside is limited by the option. If the stock price falls you profit and if it rises you only lose the cost of the option, exactly like a standard put.

4. Change the call into a put if your opinion of the underlying stock changes by short-selling the stock.