The Synthetic Put option strategy allows for a known and limited loss when shorting stock.
Option Trading Subjects:
Strategy: Synthetic Put
a.k.a. Protective Call
The Outlook: Bearish. The stock must fall by as much as the long call debit to have a gain.
The Trade: Short Stock and buy Long Call, OTM, using the next strike price above the current stock price.
Gains when: Stock falls enough by the expiration date to overcome long call debit.
Maximum Gain: Limited only by the stock price falling to zero.
Loses when: Stock goes up, does not fall, or does not fall enough by the expiration date.
Maximum Loss : Limited to the strike price - the short stock entry price + the long call debit.
Breakeven Calculation: Strike Price bought - short stock entry price - long call debit.
Advantages compared to short stock: Limited and known in advance possible loss.
Disadvantages compared to short stock: Slightly more stock movement needed to be profitable.
Volatility: After entry, increasing implied volatility is positive.
Time: After entry, the passage of time is negative.
Margin Requirement : None. Initial long call debit must be paid in full.
Variations: use ATM or ITM strike for the long call to simulate a Long Put, ATM or Long Put, OTM.
Synthetic Equivalent: Long Put, ITM.