Synthetic Shorts

Discussion in 'Options' started by bwilliams5534, Mar 4, 2009.

  1. Hi...thanks for taking the time to read my question.

    I have recently began looking at synthetic shorts and have a few basic questions on them. (Please note: I do not want to debate the concept of a synthetic short vs, normal short or anything like that...I just want these basic questions answered if possible and you can of course throw in any other information you have. Thanks)


    1. Other than the larger bid and ask spread and lower volume that one will suffer from on options as opposed to the stock itself, are there any other issues that should concern me about synthetic shorting as compared to normal shorting?

    2. Am I basically guaranteed that the synthetic short will work exactly as the risk profile of it is shown (same risk profile as going short) or is there instances where this profile could be thrown off and I could lose money even if I was right about the direction of the underlying or not make as much as the risk profile would led me to believe? I understand that when looking at the greeks of the trade this should be impossible, but I just want to check.

    Also when dealing with further out month options:

    3. When looking at different months pricing on synthetic shorts, it appears that the further out you go, the more capital you have to put up to achieve the same profit as you would in an early months...but as you go further out you also suffer from less theta and obviously have more time for your synthetic short to go your way. Other then this higher capital ratio is there any other concern I should have about going with a further out month when dealing with synthetic shorts?

  3. MTE


    Technically it's not a synthetic stock, but a synthetic forward. In other words, the interest rate and dividends are built into the price of the synthetic.