Synthetic Put

Filed Under: ,
Dictionary Says

Definition of 'Synthetic Put'


A trading strategy that combines the short sale of a security with a long-call position on the same security. Synthetic put combination is to effectively create a synthetic put position that has almost the same risk-reward attributes as a straightforward put position, but with added advantages such as flexibility and liquidity. Synthetic puts are often used by institutional investors to disguise their trading bias (bullish or bearish) on a specific security.

Investopedia Says

Investopedia explains 'Synthetic Put'


For example, a synthetic put on Widget Maker Inc. that is trading at $20 would consist of a short sale on the stock, and the simultaneous purchase of short-term calls on the stock with a strike price of $20. This combination trade is equivalent to buying a put on Widget Maker Inc. with a strike price of $20. If the stock price declines to $10 by the time the calls expire, the net profit on the synthetic put position would be $10 - i.e. the short sale position would have a profit of $10, while the calls will expire worthless. If a straight put with a strike price of $20 had been purchased instead, the profit on it would also be $10.

comments powered by Disqus
Hot Definitions
  1. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  2. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  3. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  4. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  5. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  6. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently held an initial public offering (IPO). The underlying indexes tracked by IPO ETFs vary from one fund manager to another, but index IPO ETFs are usually passively managed and contain equities that have recently been offered to the public.
Trading Center