Understanding Synthetic Short Options Strategy
Savvy traders know that selling a stock short has its downsides, such as borrowing shares from a broker.
A synthetic short options strategy allows investors to simulate the risk/reward of an actual short stock position without borrowing the stock.
What is a Synthetic Short?
A synthetic short combines a long put and a short call at the same strike price, initiated by buying a near-the-money put and simultaneously selling a call at the same strike.
- Buy to open a near-the-money put
- Sell to open a call at the same strike
Variations of Synthetic Short
The trade can be modified by playing the call and put at different strikes, known as a split-strike.
A synthetic short could be an ideal play for bearish traders who want to avoid borrowing shares from a broker.
Author's summary: Synthetic short strategy simulates short stock position.