Synthetic Short Stock

Gain exposure to the price movements of a particular stock without actually shorting the stock

Alias

Short Combination, Combo Strip

Descriptions

An investor who is synthetically short a stock will typically hold a short call option and a long put option on that stock with the same expiration date and strike price.
The net effect of this position is similar to shorting the stock itself, as the investor will profit if the stock price decreases and will incur a loss if the stock price increases. However, the investor does not actually borrow and sell the stock, and therefore does not have to worry about the potential difficulty and cost of locating shares to borrow. Additionally, the investor’s potential profit and loss are limited by the strike prices of the options, whereas shorting the stock directly allows for unlimited profit potential. Synthetic short stock can be a useful tool for investors who want to speculate on a decrease in the price of a particular stock without the risk of unlimited loss.

Breakeven

Leg 1 minus the net debit paid

Sweet Spot

stock to go down

Max Profit

substantial if stock goes to zero, but limited to Leg 1 minus the net debit paid

Max Loss

unlimited if the stock price goes up.