Tim Olson
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1.5 KiB
description, tags
| description | tags | |||||
|---|---|---|---|---|---|---|
| A sideways strategy shorting stock and selling two ATM puts at strike K, replicating a short straddle by replacing the short call with a synthetic short call. |
|
Short Put Synthetic Straddle
Section: 2.31 | Asset Class: Options | Type: Income
Overview
The short put synthetic straddle (the same as a short straddle with the call replaced by a synthetic call) amounts to shorting stock and selling two ATM (or nearest OTM) put options with strike K. The trader's outlook is neutral. This is a capital gain strategy. We assume S0 >= K.
Construction
- Short 1 share of stock at S0
- Sell 2 ATM put options at strike K, same expiry
Net credit: C
Payoff Profile
f_T = S0 - S_T - 2 × (K - S_T)+ + C
- Upper breakeven: S*_up = S0 + C
- Lower breakeven: S*_down = 2K - S0 - C
- Max profit: P_max = S0 - K + C (at S_T = K)
- Max loss: L_max = unlimited (stock can fall without bound; short 2 puts + short stock)
Key Conditions / Signals
- Neutral view; expects stock to stay near K through expiry
- S0 >= K (stock at or above the put strike)
- High implied volatility makes the collected credit from the two short puts larger
Notes
Unlimited loss on the downside due to the two short puts combined with the short stock position. The short stock provides partial offset against falling prices but is insufficient beyond the breakeven. Active management or stop-losses are essential.