What Is a Synthetic Put?

A synthetic put is an options strategy that combines a short stock position with a 澳洲幸运5开奖号码历史查询:long call option on that same stock to mimic a 澳洲幸运5开奖号码历史查询:long put option. It's also called a synthetic long put. Essentially, an investor who has a short position in a stock purchases an 澳洲幸运5开奖号码历史查询:at-the-money call oꦬption on that same stock. This action is taken to protect against appreciati🐠on in the stock's price. A synthetic put is also known as a married call or protective call. 

Understanding Synthetic Puts

The synthetic put is a strategy that investors can utilize when they have a bearish bet on a stock and are concerned about potential near-term strength in that stock. It is similar to an insurance policy except that the investor wants the price of the underlying stock to fall, not rise. The strategy combines the 澳洲幸运5开奖号码历史查询:short sale of a 𓂃security with a long-call position on the same security.

A synthetic put mitigates the risk that the underlying price will increase. It does not, however, deal with other dangers, which may leave the investor exposed. Because it involves a short position in the underlying stock, it carries with it all those associated risks—fees, margin interest, and the possibility of having to pay 澳洲幸运5开奖号码历史查询:dividends to the investor from wh🎶om the shares were borrowed to sell short. 

Institutional investors can use synthetic puts to disguise their trading bias—be it bullish or bearish—on specific securities. However, for most investors, synthetic puts are best suited for use as an insurance policy. An increase in 澳洲幸运5开奖号码历史查询:volatility would be beneficial to this strategy while 澳洲幸运5开奖号码历史查询:time decay would impact it negatively.

The maximum profit for both a simple short position and a synthetic put is if the stock's value falls to zero. Note that any benefit from a synthetic put must be weighted against the options' premium.

A synthetic put strategy helps protect against an increase in the stock's price, effectively putting a cap on the stock price. The cap limits upside risk for the investor (i.e. the risk that𝕴 the short position's stock price rises).

The risk of a synthetic put strategy is limited to the difference between the price at which the underlying stock was shorted and the option's 澳洲幸运5开奖号码历史查询:strike price (as well as any commissions). Put another way, at the time of the purchase of the option, if the price at which the investor shorted 🅰the stock was equal to the strike price, the loss for the strategy would be the premiu༺ms paid for the option.

• Maximum Gain = Short sale price - Lowest stock price (ZERO) - Premiums
• Maximum Loss = Short sale price - Long call strike price - Premiums
• Breakeven Point = Short sale price - Premiums

When to Use a Synthetic Put

Rather than a profit-making strategy, a synthetic put is a capital-preserving strategy. With that, the cost of the call portion (the option premium) becomes a built-in cost. The option's price reduces the profitability of the method—assuming the underlying stock moves in 🉐the desired direction, lower.

Thus, synthetic puts are often use💎d as insurance policies against short-term spikes in stock prices (in an otherwise bearish stock), or as a protection against an unforeseen move up𝓰ward in the stock price.

Newer investors may benefit from knowing that their losses in the stock market are limited. This safety net can give them confidence as they learn more about different investing strategies. Of course, any protection will come at a cost, which includes the price of the option, 澳洲幸运5开奖号码历史查询:commissions, and other possible fees.