Synthetic short stock

Summary

Synthetic short stock sells a call and buys a put at the same strike, so it moves like 100 shares sold short, with no shares to borrow, for a bet on a fall. In the XYZ example you collect $4 and break even at $100.04; a fall to zero would make $10,004. Like any short sale, a rise has no limit on the loss: at $150 you would lose $4,996.

Key terms

synthetic short stock

A sold call and a bought put at the same strike and expiry, which together move like 100 shares sold short.

short sale

Selling shares you have borrowed, which gains as the price falls and loses without limit as it rises.

put-call parity

The rule that a call minus a put at one strike equals the stock minus the strike's value today, less expected dividends.

same strike

When the call and the put you sell share one strike price, here $100.

net credit

When a pair of trades brings cash in overall.

break-even

The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.

early assignment

Being assigned before the end date, which can happen on any day with American-style options.

margin

Money your broker holds against what a sold position could lose.