Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Short Combination

AKA Synthetic Short Stock; Short Combo

The Setup

  • Sell a call, strike price A
  • Buy a put, strike price A
  • The stock should be at or very near strike A

Who Should Run It

All-Stars only

NOTE: The short call in this strategy creates theoretically unlimited risk. That is why it is only for the most advanced option traders.

When to Run It

You’re bearish.

The Sweet Spot

You want the stock to completely tank.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

Buying the put gives you the right to sell the stock at strike price A. Selling the call obligates you to sell the stock at strike price A if the option is assigned.

This strategy is often referred to as “synthetic short stock” because the risk / reward profile is nearly identical to short stock.

If you remain in this position until expiration, you are probably going to wind up selling the stock one way or the other. If the stock price is above strike A, the call will be assigned, resulting in a short sale of the stock. If the stock is below strike A, it would make sense to exercise your put and sell the stock. However, most investors who run this strategy don’t plan to stay in their position until expiration.

At initiation of the strategy, you will most likely receive a net credit, but you will have some additional margin requirements in your account because of the short call. However, those costs will be fairly small relative to the margin requirement for short stock. That’s the reason some investors run this strategy: to avoid having too much cash tied up in margin created by a short stock position.

Maximum Potential Profit

Potential profit is substantial if stock goes to zero, but limited to strike price A plus the net credit received or minus the net debit paid to establish the strategy.

Maximum Potential Loss

Risk is theoretically unlimited if the stock price keeps rising.

Break-even at Expiration

Strike A plus the net credit received or minus the net debit paid to establish the strategy.

TradeKing Margin Requirements

Margin requirement is the short call requirement.

NOTE: If established for a net credit, the proceeds may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-unit basis. So don’t forget to multiply by the total number of units when you’re doing the math.

As Time Goes By

For this strategy, time decay is somewhat neutral. It will erode the value of the option you bought (bad) but it will also erode the value of the option you sold (good).

Implied Volatility

After the strategy is established, increasing implied volatility is somewhat neutral. It will increase the value of the option you sold (bad) but it will also increase the value of the option you bought (good).

Option Guy's Tips

  • It’s important to note that the stock price will rarely be precisely at strike price A when you establish this strategy. If the stock price is above strike A, you’ll receive more for the short call than you pay for the long put. So the strategy will be established for a net credit. If the stock price is below strike A, you will usually pay more for the long put than you receive for the short call. So the strategy will be established for a net debit. Remember: The net credit received or net debit paid to establish this strategy will be affected by where the stock price is relative to the strike price.
  • Dividends and carry costs can also play a large role in this strategy. For instance, if a company that has never paid a dividend before suddenly announces it’s going to start paying one, it will affect call and put prices almost immediately. That’s because the stock price will be expected to drop by the amount of the dividend after the ex-dividend date. As a result, put prices will increase and call prices will decrease independently of stock price movement in anticipation of the dividend. If the cost of puts exceeds the price of calls, then you will have to establish this strategy for a net debit. The moral of this story is: Dividends will affect whether or not you will be able to establish this strategy for a net credit instead of a net debit. So keep an eye out for them if you’re considering this strategy.
  • On the other hand, you may want to consider running this strategy on stock you want to short but that has a pending dividend. If you are short stock, you will be required to pay any dividends out of your own account. But with this strategy, you’ll have no such requirement.


Tools

619 ETF Center Image
ETF Center Tap into the latest market activity in exchange-traded funds (ETFs), including most-actives, top performers and more.

623 Option Strategy Scanner Image
Options Strategy Scanner Find the right basic or advanced options strategy to meet your specific criteria.

1290 Mutual Fund screener small image
Mutual Fund Screener Pin-point the right mutual fund for your investing goals. Create customized screens based on your own search criteria.

More tools...

Related Strategies

352 Back Spread w/Puts Image
Back Spread with Puts This is an interesting and unusual strategy. Essentially, you’re selling an at-the-money short put spread in order to help pay for the extra out-of-the-money long put...

403 Inverse Skip Strike Butterfly w/ Puts image
Inverse Skip Strike Butterfly with Puts You can think of this strategy as a put backspread with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at...

1362 Short Index ETF
Short Index ETF An index exchange-traded fund is typically comprised of most or all of the stocks that make up a particular index, such as the Dow Jones Industrial Average, the S...

More strategies...