4/8/23, 6:57 PM Short Combination | Synthetic Short Stock - The Options Playbook

THE

OPTIONS PLAYBOOK

Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between

Home
Options Basics
Rookie's Corner
Option Strategies
Managing Positions
Glossary

The Options Strategies » Short Combination

Short Combination
AKA Synthetic Short Stock; Combo

The Setup
Sell a call, strike price A
Buy a put, strike price A
The stock should be at or
very near strike A

Who Should Run It

All-Stars only

NOTE: The short call in this

The Strategy strategy creates theoretically
unlimited risk. That is why it is
Buying the put gives you the right to sell the stock at strike price A. Selling only for the most advanced option
the call obligates you to sell the stock at strike price A if the option is traders.
assigned.
When to Run It
This strategy is often referred to as “synthetic short stock” because the risk /
reward profile is nearly identical to short stock.
https://www.optionsplaybook.com/option-strategies/synthetic-short-stock/ 1/6
4/8/23, 6:57 PM Short Combination | Synthetic Short Stock - The Options Playbook

If you remain in this position until expiration, you are probably going to You’re bearish.
wind up selling the stock one way or the other. If the stock price is above
strike A, the call will be assigned, resulting in a short sale of the stock. If the
stock is below strike A, it would make sense to exercise your put and sell the Break-even at
stock. However, most investors who run this strategy don’t plan to stay in Expiration
their position until expiration.
Strike A plus the net credit
At initiation of the strategy, you will most likely receive a net credit, but you received or minus the net debit
will have some additional margin requirements in your account because of paid to establish the strategy.
the short call. However, those costs will be fairly small relative to the margin
requirement for short stock. That’s the reason some investors run this
strategy: to avoid having too much cash tied up in margin created by a short The Sweet Spot
stock position.
You want the stock to completely
Options Guy's Tips tank.

Maximum Potential
It’s important to note that the stock price will rarely be precisely at
Profit
strike price A when you establish this strategy. If the stock price is above
strike A, you’ll receive more for the short call than you pay for the long put. Potential profit is substantial if
So the strategy will be established for a net credit. If the stock price is below stock goes to zero, but limited to
strike A, you will usually pay more for the long put than you receive for the strike price A plus the net credit
short call. So the strategy will be established for a net debit. Remember: The received or minus the net debit
net credit received or net debit paid to establish this strategy will be affected paid to establish the strategy.
by where the stock price is relative to the strike price.

Dividends and carry costs can also play a large role in this strategy. For
Maximum Potential
instance, if a company that has never paid a dividend before suddenly Loss
announces it’s going to start paying one, it will affect call and put prices
almost immediately. That’s because the stock price will be expected to drop Risk is theoretically unlimited if
by the amount of the dividend after the ex-dividend date. As a result, put the stock price keeps rising.
prices will increase and call prices will decrease independently of stock
price movement in anticipation of the dividend. If the cost of puts exceeds
the price of calls, then you will have to establish this strategy for a net debit. Ally Invest Margin
The moral of this story is: Dividends will affect whether or not you will be Requirement
able to establish this strategy for a net credit instead of a net debit. So keep
an eye out for them if you’re considering this strategy. Margin requirement is the short
call requirement.
On the other hand, you may want to consider running this strategy on stock
you want to short but that has a pending dividend. If you are short stock, you NOTE: If established for a net
will be required to pay any dividends out of your own account. But with this credit, the proceeds may be applied
strategy, you’ll have no such requirement. to the initial margin requirement.

After this position is established,

an ongoing maintenance margin
requirement may apply. That
means depending on how the
underlying performs, an increase
(or decrease) in the required
margin is possible. Keep in mind
this requirement is subject to
change and is on a per-unit basis.
So don’t forget to multiply by the
https://www.optionsplaybook.com/option-strategies/synthetic-short-stock/ 2/6
4/8/23, 6:57 PM Short Combination | Synthetic Short Stock - The Options Playbook

total number of units when you’re

doing the math.

As Time Goes By
For this strategy, time decay is
somewhat neutral. It will erode the
value of the option you bought
(bad) but it will also erode the
value of the option you sold
(good).

Implied Volatility
After the strategy is established,
increasing implied volatility is
somewhat neutral. It will increase
the value of the option you sold
(bad) but it will also increase the
value of the option you bought
(good).

Check your strategy with Ally Invest tools

Use Ally Invest’s Profit + Loss Calculator to establish break-even points, evaluate how your strategy
might change as expiration approaches, and analyze the Option Greeks.
Use the Technical Analysis Tool to look for bearish indicators.

Don’t have an Ally Invest account? Open one today!

Back to the top

SORTED BY: SKILL LEVEL / LEGS

Rookies
All Rookie Plays
Covered Call
Protective Put
Collar
Cash-Secured Put
Veterans
All Veteran Plays
Long Call
Long Put
Fig Leaf
Long Call Spread
Long Put Spread
Seasoned Veterans
All Seasoned Veteran Plays
Short Call Spread
https://www.optionsplaybook.com/option-strategies/synthetic-short-stock/ 3/6