Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Recommended Posts

Traders who implement a synthetic short call strategy are betting that the market price of an option's underlying asset will fall. The technique involves short selling owned assets and selling a put option for the amount of shares owned. The loss-risk in this strategy is unlimited, if the market price of the underlying asset rises. Traders who employ a synthetic short call strategy use assets as leverage to earn a fixed premium credit, received from the put buyer when entering the market.

 

Moneyness Review for Puts

 

Out-of-The Money (OTM) = Strike Price (less than) Market Price

In-The-Money (ITM) = Strike Price (more than) Market Price

At-The-Money (ATM) = Strike Price (equals) Market Price

 

How to Carry out a Synthetic Short Call Strategy

 

attachment.php?attachmentid=29237&stc=1&d=1338626352

 

Disney stock is worth $50 (market price) in June.

1) Trader short sells 100 shares of Disney stock

2) Trader sells the put option: DISJul50($3)

- 100 shares of Disney stock

- Strike Price $50, at-the-money (ATM), expiring in 30 days

- Premium Cost of $3

3) Trader receives a $300 credit when entering the market [$300 (received from put buyer)] Total cost to enter the market: -$300

Result one: Disney stock remains at $50 in July

a) The put option sold expires worthless (OTM).

b) The short sale realizes no gain.

c) The trader's profits total $300 after keeping the credit earned when entering the market.

 

Result two: Disney stock falls to $40 in July.

a) The short sale realizes a $1000 gain, and the trader receives $1000.

b) The put option sold expires ITM.

c) The investor who bought the trader's put option exercises his or her right to sell 100 shares at $50. The trader pays $5000 to the buyer, and receives 100 Disney shares.

d) The trader immediately sells the 100 shares in the open market and receives $4000.

e) The trader makes a total profit of $300 after keeping the credit earned when entering the market. [$300 = $4000 (received for 100 shares) + $1000 (gain from short sale) + $300 (credit to enter market) - $5000 (paid for 100 shares)]

 

Result three: Disney stock rises to $60 in July.

a) The short sale realizes a $1000 loss, and the trader pays $1000.

b) The put option sold expires worthless (OTM)

c) The trader loses $700 after adding the credit earned when entering the market. [-$700 = $300 (credit to enter market) - $1000 (loss from short sale) ]

 

Advantages and Disadvantages in Carrying out a Synthetic Short Call Strategy

 

Pluses: The upside to this type of strategy is that the investor will gain limited profits if the put option expires at-the-money or expires at any price below it, independent of how low the market drops. The synthetic short call strategy also earns the trader a credit when entering the market, which can be used to offset losses if the underlying asset's market price rallies.

 

Minuses: The downside in using a synthetic short call is that the method has an unlimited loss-risk potential. The short sale exposes the trader to high risk when the market rallies, since any asset's market price could theoretically rise as much as demand permits. The method also limits the trader's profit potential to only what he or she received when entering the market. The investor can not profit from the short sale if the market crashes because the put option would offset any gains from the sale.

synthetic-short-call.gif.2356350c1ad57a541239465d03500e5f.gif

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By Lwayne11
      I had a bad experience in trading. I did lost $17,350 in total and i when i try to cash out one story or the other keep coming up to me at every giving point of time so i give up on them.after several weeks i came across this agency,expert recovery that help me get back about 75 percent of my lost funds. I learnt thee is a class action court proceeding to sue scam binary companies but I believe that takes more time and money paid to lawyers is way expensive. You can talk to a recovery expert.
      Reach Asherellazar at protonmail dot com
    • By DHARMIL
      SELL BANKNIFTY F&O - ₹2300
      SELL NIFTY F&O - ₹2700
      SELL STOCKS F&O - ₹5000
      Contact : 9173302081
    • By Ninjatrader_Staff
      Here is a quick educational video we created on Options on Futures.
       
    • By Ninjatrader_Staff
      Options on futures are now available to trade through NinjaTrader Brokerage! This expansion allows options traders to save on their trades with NinjaTrader’s deep discount commissions and benefit from industry-leading support.
      Why Trade Options on Futures with NinjaTrader Brokerage?
      ·  Discount Pricing: Save on trades with simple low rates
      ·  Span Margins: Real-time portfolio margining
      ·  Low Minimum: Open your account with only $1000
      In addition to the FREE NinjaTrader platform included with all brokerage accounts, traders will also have access to the CQG Desktop web-based platform to trade options on futures.
      ·  Current Clients: Contact Brokerage Support to start trading options on futures
      ·  New Clients: Open Your Brokerage Account
      Let Us Know How We Can Help
      Contact our brokerage team at 312.262.1289 to discuss how NinjaTrader’s solutions can be customized for both new & experienced traders.

      Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.
    • By fuqs
      Let's assume I was able to imply dividends from liquid options for the next 3 years, but I want to price an option expiring in the 4rd year from now. How would practitioners normally extrapolate implied dividends? From what i've observed there is a significant risk premium in implied dividends far out (implied divs are sold at discount). Actually the dividend term structure is declining. Therefore probably it makes more sense to extrapolate implied dividend rather than historical growth
  • Topics

  • Posts

×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.