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Short Synthetic Strategy

Strategy Type:

Short Synthetic is a bearish strategy. It is used when an investor expects the underlying asset's price to decrease.

Components: The strategy involves two main components:

  • Short Call Option: The investor sells (writes) a call option with a specific strike price. This option gives the investor an obligation to sell the underlying asset at the strike price if the option is exercised by the option buyer.
  • Long Put Option: Simultaneously, the investor buys a put option with the same strike price as the short call. This put option provides downside protection and limits potential losses.

Profit and Loss Potential:

  • Maximum Profit: The maximum profit is limited to the premium received from selling the call option.
  • Maximum Loss: The maximum loss is theoretically unlimited if the underlying asset's price increases significantly. The loss is partially offset by the premium received from selling the call.
Break-Even Point: The break-even point is the strike price of the short call plus the premium received.

Strategy Goals:

  • The primary goal of a Short Synthetic is to profit from a bearish view on the underlying asset by effectively mimicking the risk profile of short selling the asset.
  • The strategy aims to generate income through the sale of the call option.

Risk Management:

  • The risk is theoretically unlimited if the asset's price rises significantly. However, the premium received from selling the call partially offsets potential losses.
  • The strategy provides controlled risk through the long put option, which offers protection against excessive losses.