Synthetic Short

A synthetic short position is an options strategy that replicates short selling a stock, but without borrowing shares. This is done by buying a put option and selling a call option at the same strike price and expiration date.

How a Synthetic Short Works

• Buy a put option (bearish bet) → Gives the right to sell the stock at a set price
• Sell a call option (bearish bet) → Obligates the trader to sell the stock if assigned

Since both options have the same strike price and expiration, the position behaves like shorting the stock. If the stock price drops, the put option gains value. If the stock price rises, the short call could be assigned, forcing the trader to sell shares (just as they would if they had shorted the stock).

Key Benefits & Risks

Advantages:

• No need to borrow shares, avoiding hard-to-borrow fees
• Can be a capital-efficient way to take a bearish position
• Allows traders to profit from declining stock prices without directly short selling

Disadvantages:

• Unlimited loss potential if the stock price rises significantly (due to the short call)
• Margin requirements for the short call position
• Can be affected by time decay and volatility shifts

Traders use synthetic shorts when they want bearish exposure without borrowing stock, often for hedging or capital efficiency in a declining market.

See also: Synthetic Long and Synthetic Position