Sell Stock Short/Buy Call

A.K.A. Synthetic Long Put

investment

Opinion: Bearish to very Bearish.

Example:
Long 1 Oct 60 Call @ 5 1/8
Short 100 Shares XYZ @ $60

Description: The purchase of a Call option allows the short seller to establish a bearish position with limited risk. Because of the short stock, it is not a popular strategy.

Synthetic: As long as the Call is owned, the strategy’s risk/reward profile is equivalent to a Long Put.

When to use: Often times the position is established due to an adjustment to a long Call position. By selling XYZ short, the investor turns a bullish position (long Call) into a bearish position (synthetic long Put).

Profit & Loss Characteristics: Profit potential is limited only by the fact that XYZ cannot decline below zero. Losses are limited as long as the Call option is owned.

Break-even Point: Selling price of XYZ stock – premium paid for Call.

Time Decay: Negative. Over time, the time value portion of the Call erodes (i.e., decays). At expiration, the Call’s value will equal its intrinsic value.

Volatility: Changes in the Call option’s implied volatility has an effect on the “time value” portion of the option’s premium.

If volatility increases, the Call option will increase in price. If volatility decreases, it will decrease in price.