Investment Type: credit/debit
Strike Prices: Near The Money strike price for both legs
Expiration Month: current month for both legs
Composition: Sell Call + Buy Put

 
  Short Synthetic Future Profile Chart  
 

 
Description:

 

Short Synthetic Future is a slight variation of Short Combo by sell call and buy put at the same strike price and it’s a strategy that creates the same risk profile with Short Future and the opposite of Long Synthetic Future.

 

Unlike with Short Future, we have more flexibility in choosing the strike prices for Short Synthetic Future strategy, but be careful not to Sell deep-ITM put as it’s more likely that we got exercised.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
50
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Put
 } Premium: $1.70
Expiration Date :
December
No of Contracts :
50
    

 

Investment @ Entry = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($4,000) + $8,500 = $4,500

 

Breakeven Point = Strike Price – Net Debit = $35.00 - $0.90 = $34.10

 

Exit:

 

Best Case Scenario:

Stock Price :
$32.50 down $1.50
    
Buy/Sell :
Sell
    
Strike Price :
35 Call
 } Premium: $0.00
Expiration Date :
December

 

Stock Price :
$32.50 down $1.50
    
Buy/Sell :
Buy
    
Strike Price :
35 Put
 } Premium: $2.50
Expiration Date :
December

 

Profit @ exit = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) - Investment @ Entry = $0 + $12,500 – $4,500 = $8,000

 

Return of Investment = Profit @ Exit / Investment @ Entry = 178%

 

Worst Case Scenario : Unlimited Loss

 

Stock Price
Profit/Loss
ROI

30.00

20500

456%

32.50

8000

178%

35.00

-4500

-100%

37.50

-17000

-378%

40.00

-29500

-656%