Short Selling: Understanding the Synthetic Short Options Strategy
Savvy traders are aware that selling a stock short has its downsides, primarily the need to borrow shares from a broker.
A synthetic short options strategy allows investors to replicate the risk/reward of a short stock position without borrowing the stock.
What is a Synthetic Short?
A synthetic short combines a long put and a short call at the same strike price, initiated by buying a near-the-money put and simultaneously selling a call at the same strike.
- Buy to open a near-the-money put
- Sell to open a call at the same strike
Variations of the Synthetic Short
The trade can be modified by using different strikes, known as a split-strike synthetic short.
A synthetic short allows investors to simulate the risk/reward of an actual short stock position, without borrowing the stock.
Author's summary: Synthetic short strategy simulates short selling without borrowing stock.