Synthetic Put

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 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.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  3. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  4. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  5. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  6. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
Trading Center