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Synthetic Short Put
A synthetic short put is created when long stock position is combined with a short call of the same series. It is so named because the established position has the same profit potential a short put.
| Synthetic Short Put Construction |
| Long 100 Underlying Sell 1 ATM Call |
The covered call is a popular example of a synthetic short put.
Limited Profit Potential
The formula for calculating maximum profit is given below:
- Max Profit = Premium Received - Commissions Paid
- Max Profit Achieved When Price of Underlying >= Strike Price of Short Call
Unlimited Risk
The formula for calculating loss is given below:
- Maximum Loss = Unlimited
- Loss Occurs When Price of Underlying < Purchase Price of Underlying - Net Premium Received
- Loss = Purchase Price of Underlying - Price of Underlying - Premium Received + Commissions Paid
Breakeven Point(s)
The underlier price at which break-even is achieved for the synthetic short put can be calculated using the following formula.
- Breakeven Point = Purchase Price of Underlying - Premium Received