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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