HOME ABOUT ARCHIVES MASTERCLASS BLOG SUBSCRIBE   SIGN IN

Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

print this page
send to a friend

Synthetic Short Stock (split strikes)

Risk: limited
Reward: limited but very big

General Description
Entering a synthetic short stock w/ split strikes entails buying puts and selling an equal number of calls at a higher strike (same expiration month). It's similar to a synthetic short stock except consecutive strikes are used instead of the same strike.

(draw a synthetic short stock w/ split strikes risk diagram here)

The Thinking
You're bearish and are confident a stock will move down. Instead of shorting the stock outright, which is expensive, you replicate the gain/loss you would experience if you were short for a fraction of the cost.

Example
XYZ is at $52.50. Instead of shorting the stock, you sell (1) 55 call for $3.00 and buy (1) 50 put for $2.50. The net credit is $0.50.

If the stock moves down to $40 at expiration, the 50 put will be worth $10 (netting you a profit of $7.50), and the 50 call will be worthless (netting you a profit of $3.00). Your total profit is $10.50, and your profit continues to grow as the stock moves down.

If the stock moves up to $60 at expiration, the 50 put will be worthless (netting you a loss of $2.50), and the 55 call will be worth $5 (netting you a loss of $2.00). The total loss is $4.50, and your loss continues to grow as the stock moves up.

If the stock in unchanged on expiration day, the 50 put will be worthless (netting you a loss of $2.50), and the 55 call will also be worthless (netting you a profit of $3.00). The total gain is $0.50. This is your gain anywhere between $50 and $55.

The PL chart below graphically shows where this trade will be profitable and at a loss.