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 Shares
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
Synthetic Short Put Payoff Diagram
Graph showing the expected profit or loss for the synthetic short put option strategy in relation to the market price of the underlying security on option expiration date.

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 position can be calculated using the following formula.

  • Breakeven Point = Purchase Price of Underlying - Premium Received

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