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Visually Analyze Option Strategies
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Synthetic Put

 

Description

 

Effectively an insurance policy for covering a short position, the Synthetic Put is the opposite of a Synthetic Call. Basically, we short the stock and buy an at-the-money or slightly out-of-the-money (higher strike) call. The net effect is that of creating the same shape as a standard Long Put but with the same leverage as shorting the stock, and we create a net credit instead of a net debit.

 

In simple terms, this means that we are capping our downside in case the stock unexpectedly rises through our stop loss. The Long Call will increase in value if the stock rises, thereby countering the loss in value of the short stock position.      

 

Market Opinion

 

Bearish.

 

P/L

 

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When To Use

 

Use this strategy if you are bearish and want a net credit by selling the stock short.

 

Example

 

XXXX is trading at $34.17 on June 1, 2011.

Short 1,000 shares of stock at $34.17.

Buy 10 August 2011 35 strike calls at $2.76.

 

Benefit

 

The benefit is that you are not putting out any capital, yet you are able to replicate a put and profit from the stock dropping.

 

Risk vs. Reward

 

The risk is limited if the stock rises. The reward is a net credit.

 

Net Upside

 

Stock price minus call premium.

 

Net Downside

 

Call strike price minus stock price plus call premium.

 

Break Even Point

 

Stock price minus call premium.

 

Effect Of Volatility

 

Effect Of Time Decay

 

Negative. Time decay erodes the value of the call.

 

Alternatives Before Expiration

 

You can exit the position if the stock increases above the stop loss. Reverse your position or buy back the stock and keep the log call.

 

Alternatives After Expiration

 

If the stock drops by more than the premium, then you make a profit at expiration.

 
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