October 29, by m slabinski. A synthetic position can be created for any option or stock strategy. Once we understand the synthetic alternatives for puts, calls, and stock, we can use the alternatives to replace parts of more complicated option strategies. We are going to go over three of the more common synthetic strategies in more detail: A short straddle is a trading strategy where we are short a call and short a put at the same strike price.

In the picture below, you will see a delta neutral short at the money ATM straddle. To change a short straddle into a synthetic short straddle, we replace the short call or the short put with its synthetic alternative.

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Depending on whether we replace the short put or short call, we can end up with two different constructions of a synthetic short straddle. If we replace the call option, it will be a synthetic put short straddle we call it a put short straddle because both the options are puts. As we cover more advanced strategies, it is helpful to understand how each individual part of a strategy works. But more generally, how an initially complex-looking strategy, like 2 short puts and shares of short stock, is equivalent to a short straddle.

In the first season of Where Do I Start WDIS on the tastytrade network and in doughTV , father-daughter team Case and Tom Sosnoff start learning options from the very beginning. After going through the basics of puts and calls, they begin game planning her first option trade. Typically, a common first option trade is a covered call. We own stock already and we sell a call against it, collecting a credit and reducing our cost basis.

Reducing our cost basis allows us to increase our probability of profit POP , while maintaining our initial position. The trade feels and looks very intuitive, as we are long shares of stock and the call option is an agreement we get paid to make it to sell the stock for more than we bought it for.

In WDIS, Tom talks about the new age of investing where instead of Case trading a covered call or buying stock, she will sell a naked short put. To those unfamiliar with options, a short put can look scary, because it involves trading undefined risk and potentially using margin.

Although a short put has undefined risk, the risk is actually similar to owning shares of stock like in a covered call. The undefined risk of a short put is actually less than owning shares of stock, because we receive a credit that offsets some of our potential risk. Not only that, our short put that we sell is out of the money OTM , which means it is sold BELOW the stock price. If the stock does go to zero, our max loss will almost always be less than buying the stock outright and selling a call against it.

Trading a short put instead of a covered call is helpful, because it allows us to have the same exposure as a covered call with less moving parts.

Synthetic short stock is a helpful synthetic to have in our tool bag if we want to short an underlying. When we short a stock, we borrow stock from the market and sell the borrowed shares.

When we do this, we have an outstanding obligation to return the initial shares we borrowed. If the underlying goes down, we can buy back the shares for less than we sold them, and close the loop for a profit.

If the underlying instead goes higher, it will be more expensive for us to purchase the shares back to fulfill the obligation, and the position will lose money. Sometimes, it is hard to borrow stock. When the market is unable to lend shares of stock, we will be unable to short the underlying using stock.

When we cannot short stock, we refer to the underlying as hard to borrow HTB or none to borrow NTB. Instead of shorting the stock, we buy a put and sell a call at the same strike price to create a synthetic short stock position. When we trade a synthetic that involves using options to replicate stock or vice-versa , it is important to be aware of early assignment risk.

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If we are using a synthetic strategy to arbitrage an apparent mispricing, it is always good to double and triple check the variables, as the market almost always prices things efficiently. When trading a synthetic strategy, we often add or take away a stock component to a strategy. It is important we consider any sort of planned dividend, or maybe even a special one-time dividend into our calculations.

Normally when we are short a strategy like a straddle, it is not something we consider as much, but if we are long or short stock in a synthetic strategy, the dividend will have more of an effect. If we see a mispricing that appears too good to be true, there is a good chance we are missing some information and it really is too good to be true.

We can use synthetics to create any option or stock position.

A short straddle has two synthetics: If stock is hard to borrow, we can trade a synthetic short stock position to get short the underlying. Still have questions about synthetic strategies? Email us at support dough. From the words of someone new to options trading: Read on to learn more. Click here to learn how we use correlation to improve our portfolio diversification, beta weighting, hedging, and scaling. Beginner intermediate Blog Sign Up Login.

Short Straddle, Covered Call, and Short Stock. Turning a Short Straddle into a Synthetic Short Straddle A short straddle is a trading strategy where we are short a call and short a put at the same strike price.

Unlimited To change a short straddle into a synthetic short straddle, we replace the short call or the short put with its synthetic alternative.

Simplifying a Covered Call: Short Put In the first season of Where Do I Start WDIS on the tastytrade network and in doughTV , father-daughter team Case and Tom Sosnoff start learning options from the very beginning.

When we trade a covered call , we are: When we trade a short put in a margin account, we are able to place the trade for less buying power. Depending on our trading style, a short put can be easier to manage.

If the underlying begins to move against us, we have many more options in terms of management when compared to a covered call.

When a Stock is Hard to Borrow Synthetic short stock is a helpful synthetic to have in our tool bag if we want to short an underlying. Short shares of stock Max Profit: Stock Sale Price Max Loss: Unlimited Sometimes, it is hard to borrow stock.

Synthetic Strategies Arbitrage If we are using a synthetic strategy to arbitrage an apparent mispricing, it is always good to double and triple check the variables, as the market almost always prices things efficiently. Mar 18, Beginner , education , options trading Josh Fabian Comment. Jan 21, options trading , new to options Jenna DiMaria Comment. What Trading Options Taught Me About Fixing Door Locks. Dec 18, scaling , Greeks , trade management , volatility , options trading , beta weighting , hedging m slabinski Comment.