Investment Type: Credit
Strike Prices: OTM/ATM
Expiration Month: No Restriction
Composition: Sell Stock + Buy Call

 
  Synthetic Put Profile Chart  
 

 
Description:

 

Synthetic Put is the opposite of Synthetic Call. The strategy essentially consists of shorting the stock and buy Call Option to hedge against loss that might occur if the stock rally. As a result, Synthetic Put has the same risk profile as Buy Put and we create a net credit.

 
  Example  
 

 

Entry:


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


Sell 100 MSFT Stock @ $34

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
1
    

 

Investment @ Entry = (Stock Price x 100 Shares) + (Premium x No of Contracts x 100 Shares) = ($3,400) + $80 = credit ($3,320)
Breakeven Point = Stock Price – put premium = $34.00 - $0.80 = $33.20

 

Exit:

 

Best Case Scenario:

Stock Price :
 $30.00 down $4.00
    
Strike Price :
35 Call
 } Premium: $0.00
Expiration Date :
December

 

Profit @ Exit = (Stock Price x 100 Shares) + (Premium x No of Contracts x 100 Shares) – Investment @ Entry = ($3,000) – ($3,320) = $320

 

Return of investment = Profit @ Exit / Investment @ Entry = 10%

 

Worst Case Scenario : Investment @ Entry

 

Stock Price
Profit/Loss
ROI

30.00

320

10%

32.50

70

2%

35.00

-180

-5%

37.50

-180

-5%

40.00

-180

-5%