Synthetic Short Put – The Option Strategy Desk Reference

Synthetic Short Put

Strategy: Sell n ATM Calls, 56 DTE

Buy n × 100 Shares

Example:

Price Chart: Uptrending

Current IV%: 20%

IV Rank: 30

Trade: Sell n ATM call option contracts; buy/own n × 100 shares of stock.

Typical Strike Delta:

ATM Short Calls 0.50 to 0.45

Goals: The trader expects a price rally in the underlying security, as shown in this trade’s risk profile. As the price rallies, the stock initially achieves 2× the premium value lost by the short call options. As the short calls move deeper ITM, the corresponding Delta values increase, which reduces the incremental profit contributed by the uptrending stock. If the price experiences an unexpected drop, the short calls provide a hedge against the loss in stock value. Initially, the 0.50 Delta value of the ATM short calls is one-half the Delta 1.0 value of the long stock.

Manage: When the short stock rallies in value by several dollars per share, the trader may decide to sell it for profit and buy to close the short puts to cut off further loss and to prevent assignment. Because the return of profit diminishes as the stock rallies, this trade should be closed once it achieves 25 to 30 percent in profit. If the stock is expected to continue its upward trajectory, consider closing the short calls and selling an OTM short call for additional premium.

Profit: Close the short call and sell the stock when 25 to 30 percent profit is achieved. Alternatively, close the short call options, retain the stock, and sell OTM calls (covered calls) for additional income.

Loss: If not carefully managed, this trade can potentially lose 50 percent or even more if the trade is held during a drop in the price of the stock.