Synthetic Short Call Option Strategy

Synthetic short call is a synthetic option strategy with two legs. It replicates the short call strategy using short position in the underlying asset and short put option. Like short call, it is bearish and has unlimited risk.

synthetic short call option strategy

Setup

Synthetic short call is the inverse position (other side of the trade) to synthetic long call. It combines short put option with a short position in the underlying asset.

Example

Let's say a stock is currently trading at $59.06 per share. A synthetic short call position can be created with the following transactions:

  • Sell short 100 shares of the stock.
  • Sell one contract of the 60-strike put option.

This replicates a short position in the call option with the same strike (60) and expiration as the put option used.

It is important to exactly match the position sizes. If one option contract represents 100 shares of the underlying stock (as for US traded stock options), we need to short 100 shares for every put option contract sold.

Payoff

The risk profile is the same as with classic short call.

synthetic short call option strategy

The strategy results in constant profit if underlying price ends up below the put strike at expiration.

Above the strike, profit decreases with rising underlying price and eventually turns to a loss.

Maximum loss is unlimited, as prices of most underlying assets can theoretically go to infinitely high levels.

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