Synthetic Short Put Option Strategy
What are the characteristics of this option strategy?
The Synthetic Short Put Option Strategy is an advanced level strategy that is used to accomodate near term downside for a stock that trader is bullish on. This strategy consists of writing a call option and buying stock. This way, the investor can create an effective synthetic put option limiting the downside in near term.
Is this a bullish, bearish or neutral strategy?
This strategy is a neutral to mild bearish strategy. It is used to hedge downside risk of owning a share in short term.
Is this a beginner or an advanced option strategy?
This strategy is a advanced level strategy. It requires the trader to write call option at the right time and neutralize it at the right time to gain maximum benefits from near term volatility/bearishness
In what situation will I use this strategy?
This strategy is typically used when the investor is expecting the underlying stock or index to stay mostly or slowly volatile, and as such is looking to earn income from the premiums of the options they are writing.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
This strategy typically falls in the middle range in terms of risk-reward and probability of profit, with slightly above-average rewards and a reasonable probability of profitability.
How is this strategy affected by the greeks?
This strategy is affected mainly by the delta and vega of the options, as it is designed to reduce potential losses by writing the call option. The delta will help determine the potential losses due to the downside movements of the underlying stock or index while vega will determine how much the strategy can be affected by changes in implied volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy performs best when implied volatility is in the medium to high range, with a VIX level between 20 and 40.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting this strategy when the trade goes against you is relatively straightforward and can be done by either buying a call option to cover the existing call option, closing the whole position and taking the loss, or using an option spread. However, this strategy does have a few complexities which can make it difficult for a beginner trader to adjust.
Where does this strategy typically fall in the range of commissions and fees?
This strategy typically falls in the middle range of commissions and fees, as it requires the sale of a call option and purchase of a futures contract.
Is this a good option income strategy?
Yes, the Synthetic Short Put Option Strategy is a good option income strategy, as it can be used to generate income. However this strategy is meant for a different purpose. There are many other beginner level strategy that are better in terms of generating income.
How do I know when to exit this strategy?
The best time to exit this strategy is when the investor is satisfied that they have achieved the desired downside, or when the risk/reward ratio no longer makes sense. Generally, it is best to exit this strategy before expiration to maximize the potential gains.
How will market makers respond to this trade being opened?
Market makers will generally respond positively to this trade, as it creates trading opportunities for them.
What is an example (with calculations) of this strategy?
For example, an investor buys futures of a XYZ stock trading at $100. After a while, the share price has increased to $150 and the investor expects the share price to correct a bit while he foresees further upside in long term. He hedges the share price correction by selling call option at strike price of $150. This way, the investor has replicated a short put.
How can MarketXLS help?
MarketXLS is a comprehensive set of tools for constructing and managing option strategies. It offers a comprehensive range of tools for constructing and managing option strategies, including options pricing and the Greeks, advanced risk-reward analyses, and trade execution. With MarketXLS, you have the tools to maximize your profits and minimize your risks.
Here are some templates that you can use to create your own models
Synthetic Short Straddle with Puts
Conversion Strategy
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Synthetic Short Straddle With Puts Option Strategy
Overview of Synthetic Strangle Investing
Conversion Arbitrage Options Strategy
Synthetic Long Stock Option Strategy (Explained With Excel Template)
Collar Option Strategy – A Synopsis