Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bearish capital-gain strategy buying an ATM put and selling an ATM call at the same strike K = S0, replicating a short forward contract on the underlying. |
|
Short Synthetic Forward
Section: 2.11 | Asset Class: Options | Type: Speculation
Overview
The short synthetic forward amounts to buying an ATM put option and selling an ATM call option with the same strike K = S0. This can be a net debit or net credit trade; typically |H| << S0. The trader's outlook is bearish: this strategy mimics a short stock or futures position and replicates a short forward contract with delivery price K and the same maturity as the options. This is a capital gain strategy.
Construction
- Buy 1 ATM put option at strike K = S0
- Sell 1 ATM call option at strike K = S0, same expiry
Net debit or credit H (H = D for net debit trade, H = -C for net credit trade)
Payoff Profile
f_T = (K - S_T)+ - (S_T - K)+ - H = K - S_T - H
- Breakeven: S* = K - H
- Max profit: P_max = K - H (if stock goes to zero)
- Max loss: L_max = unlimited (stock can rise without bound)
Key Conditions / Signals
- Strongly bearish outlook seeking full participation in downside
- Useful when short-selling the stock directly is restricted or costly
- Typically near-zero net premium (H is small relative to S0)
Notes
The payoff is linear in S_T — identical to short stock (minus K - H). The upside is not limited; the position loses as the stock rises above K, just like a short stock position.