Synthetic Short Position

A synthetic short position is a combination of a long put and a short call.

Often the put is ITM and the call is OTM. Generally, this pair is comprised of equal contracts for each, and they combine for a -1.00 delta position (or very close to it).

With a synthetic short position, a decline in the underlying stock will result in a point-for-point gain to the synthetic short position, and a rise in the underlying stock will result in a point-for-point loss to the synthetic short position.

A synthetic short position is a bearish option strategy, also called a stock replacement strategy in lieu of short selling the underlying stock.  This strategy utilizes less margin, and can avoid the sometimes hard-to-borrow scenario whereby shares may be difficult to locate for a borrow to short sell.  However, this strategy is limited in duration due to the expiration date on the options.

Synthetic Call – A synthetic call is the combination of long stock and a long put.

Synthetic Put – A synthetic put is the combination of short stock and a long call.

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