Synthetic Put

What is a 'Synthetic Put'

A synthetic put is 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Synthetic Call

    An investment strategy that mimics the payoff of a call option. ...
  2. Reverse Conversion

    A finance and risk management technique based on a put-call parity ...
  3. Synthetic Forward Contract

    A position in which the investor is long a call option and short ...
  4. Synthetic

    A financial instrument that is created artificially by simulating ...
  5. Synthetic Futures Contract

    A position created by combining call and put options for the ...
  6. Synthetic ETF

    An investment that mimics the behavior of an exchange-traded ...
Related Articles
  1. Trading

    Synthetic Options Provide Real Advantages

    Participate in options trading trading that is simpler, less expensive and easier to manage.
  2. Trading

    Put-Call Parity And Arbitrage Opportunity

    Look at trades that are profitable when the value of corresponding puts and calls diverge.
  3. Markets

    Get Into Low-Cost Futures Trading With Synthetics

    If you can't trade commodity futures outright, these vehicles provide a less expensive alternative.
  4. Trading

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  5. Trading

    Prices Plunging? Buy A Put!

    You can make money on a falling stock. Find out how going long on a put can lead to profits.
  6. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  7. Trading

    What Is A Bull Put Spread?

    Investopedia explains: A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the ...
  8. Trading

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  9. Trading

    What is a Bear Put Spread?

    A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.
  10. Investing

    Short Selling Alternatives

    Investors who wish to act on a bearish view with regard to a stock, sector, or the broad market, have a couple of alternatives to short selling: put options and inverse exchange-traded funds ...
RELATED FAQS
  1. How do traders combine a short put with other positions to hedge?

    Learn how sold puts can be utilized in different types of hedging strategies, and understand some of the more common option ... Read Answer >>
  2. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
  3. What risks should I consider taking a short put position?

    Learn what risks to consider before taking a short put position. Shorting puts is a great strategy to earn income in certain ... Read Answer >>
  4. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  5. In what market situations might a short put be a profitable trade?

    Discover in what market situations a short put trade might be profitable. Selling puts is a good strategy when a trader is ... Read Answer >>
  6. How do I determine the breakeven point for a short put?

    Learn how to determine the breakeven point for a short put. Shorting puts is appropriate for sophisticated traders who understand ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center