Synthetic Short Stock creates an option position that can give dollar gains or losses equivalent to shorting stock, but with vastly increased leverage.
Option Trading Subjects:
Strategy: Synthetic Short Stock
The Outlook: Bearish.
The Trade: Buy put and sell call at same strike price. If you use a strike above the current stock price, it will be a debit entry. If you use a strike below the current stock price, it will be a credit entry.
Gains when: Stock falls.
Maximum Gain: Limited only by stock falling to zero.
Loses when: Stock rises.
Maximum Loss : Unlimited
Breakeven Calculation: Usually very close to stock price at the time of entry.
Advantages compared to short stock: Tremendously increased leverage, much less capital required.
Disadvantages compared to short stock: Tremendously increased leverage works to the upside (against the position) as well, limited life.
Volatility: no effect.
Time: no effect.
Margin Requirement : The short call is considered "naked" and the minimum margin would be 10% of the strike price of the short call times the number of shares represented, but probably more.
Synthetic Equivalent: Short Stock.