AKA Synthetic Short Stock; Combo
Buying the put gives you the right to sell the stock at strike price A. Selling the call obligates you to sell the stock at strike price A if the option is assigned.
This strategy is often referred to as “synthetic short stock” because the risk / reward profile is nearly identical to short stock.
If you remain in this position until expiration, you are probably going to wind up selling the stock one way or the other. If the stock price is above strike A, the call will be assigned, resulting in a short sale of the stock. If the stock is below strike A, it would make sense to exercise your put and sell the stock. However, most investors who run this strategy don’t plan to stay in their position until expiration.
At initiation of the strategy, you will most likely receive a net credit, but you will have some additional margin requirements in your account because of the short call. However, those costs will be fairly small relative to the margin requirement for short stock. That’s the reason some investors run this strategy: to avoid having too much cash tied up in margin created by a short stock position.
Who Should Run It
NOTE: The short call in this strategy creates theoretically unlimited risk. That is why it is only for the most advanced option traders.
When to Run It
Break-even at Expiration
Strike A plus the net credit received or minus the net debit paid to establish the strategy.
The Sweet Spot
You want the stock to completely tank.
Maximum Potential Profit
Potential profit is substantial if stock goes to zero, but limited to strike price A plus the net credit received or minus the net debit paid to establish the strategy.
Maximum Potential Loss
Risk is theoretically unlimited if the stock price keeps rising.
TradeKing Margin Requirement
Margin requirement is the short call requirement.
NOTE: If established for a net credit, the proceeds may be applied to the initial margin requirement.
After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-unit basis. So don’t forget to multiply by the total number of units when you’re doing the math.
As Time Goes By
For this strategy, time decay is somewhat neutral. It will erode the value of the option you bought (bad) but it will also erode the value of the option you sold (good).
After the strategy is established, increasing implied volatility is somewhat neutral. It will increase the value of the option you sold (bad) but it will also increase the value of the option you bought (good).
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