Synthetic Put
Description
Effectively an insurance policy for covering a short position, the Synthetic Put is the
opposite of a Synthetic Call. Basically, we short the stock and buy an ATM or slight-
ly OTM (higher strike) call. The net effect is that of creating the same shape as a stan-
dard Long Put but with the same leverage as shorting the stock, and we create a net
credit instead of a net debit.
In simple terms, this means that we’re capping our downside in case the stock
unexpectedly rises through our stop loss. The Long Call will increase in value if the
stock rises, thereby countering the loss in value of the short stock position.
P/L Profile
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