|
Direction |
Bullish |
|
Strategy Type |
Capital gain |
|
Legs |
Buy ATM put |
| |
Sell ATM call |
|
Max Reward |
Unlimited |
|
Max Risk |
Unlimited |
|
Time Horizon |
Short or long |
|
Risk Profile |
Very High |
|
|
|
Payoff Diagram
Insert Image Here
Description
Synthetic shorts allow the investor to profit from falls in the stock price. They however lose if the price rises. This replicates the payoff from short selling the stock.
Steps Involved
Buy at the money put, sell at the money call.
Rational
Traders have the intention of shorting a stock, however are wanting to do it through the options market rather than physical stock. Often volatility skews between calls and puts allow this strategy to become an opportunity.