A synthetic put is a financial derivative that combines a call option and a short position in the underlying asset to replicate the payout of a traditional put option.
Description
The call option has a strike price that is below the current market price of the underlying asset, while the short position in the underlying asset is essentially a bet that the asset will decrease in value. When the underlying asset increases in value, the call option decreases in value, while the short position in the underlying asset results in a loss. If the underlying asset decreases in value, the call option increases in value, while the short position results in a gain.
The synthetic put can be used to hedge against the risk of a decline in the price of the underlying asset, or to speculate on the possibility of the underlying asset decreasing in value. It can also be used to create more complex option strategies, such as a reverse collar, which involves selling a put option and buying a call option to create a protective floor and ceiling for the underlying asset. Synthetic puts can be used in a variety of financial markets, including stocks, bonds, commodities, and currencies. They are often used by investors and traders to manage risk and to take advantage of market movements.
Breakeven
Strike price of call option minus premium received for call option (plus premium paid for put option)
Sweetspot
Stock price goes down
Max profit
difference between the strike price of the call option and the market price of the underlying asset at expiration, minus the premium paid for the put option.
Max loss
limited to the premium received for the call option plus the difference between the strike price of the call option and the market price of the underlying asset
