Synthetic Short Stock
...or Buy Put / Write Call
Position
Type
Strike
Expiration
Quantity
Long
Put
ATM (0)
Long term
1
Short
Call
ATM (0)
Long term
1
 
         
Example:
Long 1 Oct 60 Put @ 4 1/4
Short 1 Oct 65 Call @ 3 1/8
Opinion: Bearish to very bearish
  
   
Description:
If the strike price of the two options is the same, a Long Put/Short Call position is equivalent to a Short Stock position. However, this strategy is often designed using options with two different strikes. For example, with XYZ at $60, the investor would build the spread using the 65 Call and the 60 Put (A.K.A. – Collar).

When to use:

Because this position is either equivalent to short stock (same strike price) or closely approximates short stock (split strikes), the investor utilizing this strategy must be aware of its risk/reward profile. (Unlimited risk and unlimited reward!)

This strategy is most often used when XYZ is near the mid-point between the two split strike prices. First, the spread is often established for little or no debit. And secondly, it provides a little room for XYZ to rally before the short Call becomes in-the-money.


Profit & Loss Characteristics:

Like Short Stock, the spread’s potential is unlimited. Losses are unlimited because the investor could end up with a short stock position if assigned on the short Call. Because of this fact, the investor must carefully consider the initial size of the spread!


Break-even Points:
  • If debit spread: Put strike price – spread debit
  • If credit spread: Call strike price + spread credit

Time Decay:

Varies. If XYZ is near Long Put strike price, time decay is a negative for the spread. If SYZ is near Short Call, time decay is a positive.


Volatility:

Neutral. If volatility increases, both options increase in price. Thus, the gain in the Put offsets the loss in the Call. If volatility decreases, the gain in the Call offsets the loss in the Put.

Assignment Risk:

The investor must watch XYZ for possible assignment if XYZ rallies above the Call’s strike