Short put synthetic straddle is a non-directional synthetic option strategy with two legs. It replicates short straddle with a short position in the underlying asset and short put options. Like short straddle, it has unlimited risk and limited profit.
Short put synthetic straddle is one of two variants of synthetic short straddle (the other is short call synthetic straddle).
Short straddle = short call + short put
Synthetic short straddle = synthetic short call + short put
Synthetic short call = short underlying + short put
Synthetic short straddle = short underlying + 2x short put
For example, we can replicate a 75-strike short straddle with the following transactions:
- Sell short 100 shares of the underlying stock.
- Sell two contracts of 75-strike put options.
The ratio of position sizes is important: For every 100 shares of short stock we need to sell two contracts of put options (assuming one option contract represents 100 shares, as for US traded stock options).
Differences from Short Call Synthetic Straddle
However, the variant with call options uses long underlying position, while the put variant is short the underlying (this is the opposite to synthetic long straddle – the inverse position). This can have implications to ease of trading, cash flow, and dividends.