Synthetic Put
Short stock plus buying a call gives the same P/L profile as a long put. Useful when you already hold a short and want to cap the upside risk.
Profit / Loss Diagram
Synthetic Put at expiration
What is this strategy?
The Synthetic Put replicates the P/L profile of a Long Put using short stock plus buying 1 call. The result is identical to buying a put: gains grow as the underlying falls but are capped, since price cannot go below zero, and the upside loss is limited by the call, which acts as the cover.
It is useful when you already hold a short stock position and want to cap squeeze risk. The purchased call covers the unlimited upside risk of the short stock.
Functionally equivalent to buying a put. The choice between a Synthetic Put and a direct Long Put depends on tax and margin context.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL SHORT | 100 Shares | N/A | N/A | -100 SPY @ $450 |
| BUY | 1 Call | ATM or slightly ITM | 30-90 DTE | +1 SPY May 455 Call |
Example
Short 100 SPY at $450, buy 1 455 call for $5 as a hedge.
- Short 100 SPY +$45,000 (received on the short sale)
- Long 455 Call −$500
- Maximum Loss $1,000 ($455 − $450 + $5 = $10 × 100)
- Profit if SPY = $400 +$4,500 ($50 short gain − $5 call = $45 × 100)
The Greeks
Equivalent to the delta of an ITM or ATM long put.
The call loses value with time.
The call appreciates as implied volatility rises.
Long gamma from the call.
Position Management
- 01 Roll the Call At 30 days to expiration, consider rolling the call to maintain continuous protection.