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Synthetic short stock

Short a call and long a put at the same strike and expiration; the payoff of 100 short shares without borrowing stock.

The mirror of synthetic-long-stock. Delta is about −1.00, and the position profits dollar-for-dollar as the underlying falls.

Its real use is avoiding the stock loan market. Shorting a hard-to-borrow name can cost 30% a year in borrow fees, or be impossible because no locate exists. The synthetic needs no borrow — though the options will already price in that cost, which is exactly why the put looks expensive relative to the call.

Example: XYZ at $50 with a 20% annual borrow rate. Sell the $50 call for $2.30, buy the $50 put for $4.40, net credit −$2.10. The $2.10 you effectively pay over parity is the market charging you roughly the same borrow cost the stock loan desk would.

Related: synthetic-long-stock, hard-to-borrow, put-call-parity, reversal-arbitrage

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.