Understanding Synthetic Short Selling
Savvy traders are aware that traditional short selling has its downsides, notably 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, making it an ideal play for bearish traders.
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.
Modifying the Trade
The trade can be modified by playing the call and put at different strikes, known as a split-strike synthetic short.
A synthetic short options strategy 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 shares.
- Traditional short selling requires borrowing shares from a broker.
- Synthetic short strategy combines a long put and a short call at the same strike price.
- The trade can be modified using a split-strike synthetic short.
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