Synthetic Put (Synthetic Long Put): What It Is and How It Works

Overview

A synthetic put is an options strategy that replicates a long put by combining a short position in the underlying stock with a long call option on the same stock. Also called a synthetic long put, married call, or protective call, it provides downside exposure while limiting losses from a stock price rise.

How it Works

• Position components:
• Short one share of the underlying stock.
• Long one call option on that same stock (typically at-the-money or a chosen strike).
• Purpose: The short stock position profits if the stock falls. The long call limits losses if the stock rises, capping the upside risk of the short.
• Intuition: Short stock + long call behaves like owning a put option (i.e., synthetic long put).

Payoff and Key Formulas

Let S0 be the short sale price, K the call strike, and P the option premium paid.

• Maximum gain = S0 − 0 − P = S0 − P (occurs if stock falls to zero).
• Maximum loss = S0 − K − P (loss above the call strike; if S0 = K, loss equals P).
• Breakeven = S0 − P (stock price at which combined position neither gains nor loses ignoring commissions/interest).

Note: These are simplified; commissions, margin interest, and dividend payments on borrowed shares affect net outcomes.

Risks and Costs

• Short-side risks: unlimited paper losses if stock rises, margin requirements, margin interest, recall of borrowed shares, and potential dividend payments to the lender.
• Option-related costs: premium paid, time decay (theta) erodes call value, and commissions.
• Volatility: Increased volatility generally benefits the long call; declining volatility hurts the option portion.
• Net exposure: While the call caps upside risk, other short-sale complications remain.

When to Use

• Insurance: To protect a bearish position from short-term price spikes without closing the short.
• Capital preservation: For investors who want to limit upside risk while maintaining a bearish exposure.
• Tactical/stealth trades: Institutional traders may use synthetic puts to conceal directional bias.

This strategy is typically used as protection rather than a pure profit-maximizing tactic, since the option premium reduces net returns if the stock falls.

Example

• Short stock at S0 = $50.
• Buy a call with strike K = $50 for premium P = $3.
• Breakeven = $50 − $3 = $47.
• Maximum gain if stock → $0: $50 − $3 = $47 (per share).
• Maximum loss if stock rises above $50: $50 − $50 − $3 = −$3 above the strike, plus any additional losses beyond the capped amount are prevented by the call.

(Adjust figures for commissions and financing costs.)

Summary

A synthetic put (short stock + long call) provides put-like protection for bearish traders who want to limit losses from an upward move. It acts as insurance but carries short-sale-specific risks and the explicit cost of the call premium. Consider margin rules, dividend obligations, time decay, and commissions before using this strategy.