Synthetic Short

The payoff is identical, but there are key differences: No stock borrow needed, no recall risk, no borrow fees. However, you have expiration (must roll) and assignment risk. Risk profile is the same - UNLIMITED upside loss potential.

Theoretically yes, if stock rises enough and you don't close. This is why STOP LOSSES ARE MANDATORY. Your broker will likely liquidate before you go negative, but you can lose your entire account. Size appropriately and use stops.

You sell (short) stock at the strike price. You now have short stock + long put (like a protected short). You can cover the short, or hold if still bearish. Assignment changes structure but position is still bearish.

Roll at 30-45 DTE remaining. For a 90 DTE entry, you'd roll around day 45-60. This means roughly every 2-3 months for ongoing positions.

Long put has defined risk (max loss = premium) but costs money and has time decay. Synthetic short is near-zero cost with zero theta but has UNLIMITED risk. Use put for defined risk; use synthetic short only if comfortable with unlimited risk and will use stops.

Effective short = Strike ± Net Premium. If you received S$0.05 credit for S$33 strike, effective short is S$33.05 (slightly better). If you paid S$0.10 debit, effective short is S$32.90 (slightly worse). This is your breakeven.

Due to put skew - OTM puts often have higher IV than OTM calls in equity markets. At ATM, puts may still be relatively more expensive. Also interest rates and dividends affect pricing. Skew typically works against synthetic short.

Buy an OTM call above the strike. This caps your loss at (OTM Call Strike - Synthetic Strike) + net premium. Example: S$33 synthetic short + S$38 call = max loss ~S$5,000 + premiums. This is called a 'synthetic short collar' or 'risk reversal with hedge.'

If short call is ITM, you may be assigned before ex-dividend (call holders exercise to get dividend). If assigned, you're short stock and would owe the dividend. Monitor and manage around ex-dates.

Buy back the stock immediately. You'll have the long put remaining, which you can keep (if still bearish) or sell. Assignment just changes structure - handle calmly and decide what you want.

In convertible arb, you're long convertible bond and short the underlying stock to hedge. Synthetic short can replace actual short stock, eliminating borrow concerns. However, you must manage roll dates and assignment risk carefully.

Implied lending = (Put - Call + Dividend PV) / (Stock × Time). This represents the rate implied by options pricing. Comparing to actual borrow rates shows if synthetic is cheaper or more expensive than actual short.

When stock is hard-to-borrow (high locate fees), when size is large (difficult to borrow), when recall risk is high (volatile ownership), or when you want to avoid operational complexity of short selling.

Monitor aggregate short delta exposure, correlations, and sector concentration. Diversify across names. Use portfolio-level stops. Monitor total margin usage. Consider index hedges if concentrated in sector. Roll expirations systematically.

Put-call parity: C + PV(K) = P + S. Rearranging: P - C = S - PV(K). Long put + Short call = Short stock at forward price. Synthetic short replicates shorting stock at the forward price (current price adjusted for carry). Arbitrageurs enforce this relationship.