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Options Strategies
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Synthetic Short Stock
| Strategies |
Synthetic Short Stock |
| Component |
Buy put and sell call of the same strike price/level |
| Potential Profit |
- When the stock price/index level is below the break-even point
- Substantial and equals to the break-even point minus stock price/index level
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| Maximum Loss |
- When the stock price/index level is above the break-even point
- Unlimited and equals to stock price/index level minus break-even point
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| Time Value Impact |
Neutral |
| Break-even |
The strike price/level plus net premium received or the strike price/level minus net premium paid, depends on the strike price/level chosen |
| Remarks |
Compared with Short Selling of stocks, Synthetic Short Stock provides an alternative means for investors who would like to short shares. The portfolio will be subject to the constraints of the maturity of the options. Roll-over costs may be incurred if the investor wishes to hold the position beyond the expiry date of the option contracts. Margin may also be required. The short position might be assigned at anytime before expiry. |
Example
| Component |
Buy ABC Jan $200 Put, pay $30, and sell ABC Jan $200 Call, receive $20 |
| Net Premium |
Pay $30-$20=$10 |
| Break-even |
$200-$10=$190 |
| Profit when |
Stock price is below $190 |
| Potential Profit |
$190 - stock price |
| Potential Loss |
Stock price - $190 |
| Time Value Impact |
Neutral |
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