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Synthetic Short Stock : Use Puts & Calls With Different Strike Prices (Using Split Strikes)

Creating a synthetic short stock position using split strikes in the options market. This is a little less aggressive than other similar options play we have discussed before. You are selling out-of-the-money calls and puts on either side of our current strike price; this changes the dynamics of the payoffs. We don't lose any money if we are slightly wrong but if we are slightly right we don't make as much. So we dampen off our profit potential but we also limit our loss slightly. Why would we create a synthetic short stock position? You might not be able to short the stock and also creating a split strike changes the dynamics slightly. OK.

Sell 1 out-of-the-money Call
Buy 1 out-of-the-money Put
say XYZ trades at $40
Buy 1 Put at $50 ($35 Put)
Sell 1 Call at $100 ($45 Call)

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PLEASE NOTE THAT THIS IS AN ADVANCED TUTORIAL. - if you are having problems understanding the concepts check out the full options course from the beginning.

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