Synthetic Short Stock

The only advantage of a synthetic short stock position over just shorting the stock itself is the margin requirements. It takes less margin to use a synthetic short stock position as compared to just shorting the stock.

Another reason some people use a synthetic short is because mentally, they seem less scared of the numbers using options as compared to shorting the stock, although the risk is virtually the same.

Using a stock like McDonald’s (MCD) if you wanted to short 100 shares with MCD trading at $200.00 you would bring in about $20,000.00 in cash into your account. In our account it would cost us about $10,000.00 in margin to have this position on.

If you wanted to place a synthetic short stock position with MCD trading at $200.00 and going about 30 days out, you would purchase the $200.00 Put for about $3.90 or ($390.00) and sell the $200 Call for about $4.40 or ($440.00) giving you a net cash income of about $50.00. In our account the margin required for this trade was about $4,200.00.

NOTE: The risk is the same with a short stock position or a synthetic short position.

What are the differences?

First, it has to do with the amount of cash you bring into the account.

Short Stock: $20,000.00

Synthetic Short: $50.00

Truthfully, most of the time I would rather have the extra $20,000.00 in my account.

Second, is the margin requirement.

Short Stock: $10,000.00

Synthetic Short: $4,200.00

The margin requirement for the synthetic short is about 40% of actually shorting the stock. This can be very beneficial if you are account is close to your margin limits.

Risk, the overall risk is virtually the same in both the short stock and synthetic short option position.

Overall, I really don’t see any reason to use a synthetic short position. But, it is always good to learn about new ways to use options.