Synthetic Short Call - Bearish Strategy

SYNTHETIC SHORT CALL

Synthetic Short Call is a combination of buying a put and selling a call, It is similar to short sale of the underlying stock or index. If the underlying stock or Index declines, the value of the put increases, and the option investor of the Short Synthetic call will profit, similar to someone shorting the stock. If the stock instead advances option trader is at risk on the short call. This Strategy is used when the investor is bearish on the market direction and expects market to fall down in the near term.

The risk and the reward are unlimited in synthetic short call

Investor View: Bearish on direction of the Stock / Index.

Risk: Unlimited.

Reward: Unlimited.

Breakeven: Strike Price of Put option + net premium received

Illustration

 

Synthetic Short Call Payoff Chart

Index	Nifty
Nifty Lot Size	50
Underlying Strike Price	5700
ATM Call Premium	Rs 120    (Call Premium Received)
ATM Put Premium	Rs 100    (Put Premium Paid)
Breakeven Point	5720 (Nifty Strike Price + Net Premium Received)

Reward Potential

Ø  Maximum Profit = Unlimited

Ø  Profit Achieved When Nifty Settlement Price < Strike Price of Put option + Net Premium Received

Ø  Profit = Strike Price of Long Put – Settlement Price of Nifty + Net Premium Received

Risk Potential               

Ø  Maximum Loss = Unlimited

Ø  Loss Occurs When Settlement Price of nifty > Strike Price of Call option i.e 5700 + Net Premium Received i.e. Rs 20

Ø  Loss = Nifty Settlement Price - Strike Price of Call Option - Net Premium Received + (Brokerage + Statutory Charges)

Nifty Closing Price @	Profit/Loss
5500	9000 (Profit)
5600	4000 (Profit)
5700	1000 (Profit)
5800	4000 (Loss)
5900	9000 (Loss)

Let us assume Nifty is trading at 5716 in May 2013.An options trader setups a synthetic short stock combo by buying a Nifty May 2013 5700 put for Rs 100 and sells  a Nifty 5700 May 2013 call for Rs 120. The net credit taken to enter the trade is Rs 20.

If Nifty at the day of expiry rallies to 5800 on expiration in May'13, the Nifty 5700 put purchased at Rs 100 will expire worthless but the Short Nifty 5700 Call sold at Rs 120 expires in the money and has an intrinsic value of Rs 100. Option Trades loss will be (Call Option Premium Received i.e 120 - Put Option Premium Paid i.e Rs 100 - Intrinsic Value Rs100) = Rs 80 X 50 Lot Size resulting in overall loss of Rs 4000

If Nifty at the day of expiry Slides to 5600 on expiration in May'13, the Nifty 5700 Call Sold at Rs 120 will expire worthless but the Short Nifty 5700 Put purchased at Rs 100 expires in the money and has an intrinsic value of Rs 100. Option Trades loss will be (Call Option Premium Received i.e 120 - Put Option Premium Paid i.e Rs 100 - Intrinsic Value Rs 100 ) = Rs 80 X 50 Lot Size resulting in overall loss of Rs 4000

Synthetic Long Put

Synthetic Long Put

Synthetic Long Put is a strategy to be used when the option trades is concerned Bearish to very bearish sentiment in market

This strategy involves buying a at-the-money Call Option, while Selling shares in the same underlying or Index, it is a strategy with a limited loss and unlimited profit.

An investor often employs a synthetic long put strategy to profit from the severe fall in the underlying’s price, however, as with any short sale, there is always a risk of being forced to return the stock.

Nifty Synthetic Long Put

Sell 1 lot Nifty Futures or Stock

Buy 1 ATM Index Call

Investor View: Bearish to very bearish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Breakeven:  Underlying Short Sale Price – Premium Paid

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Sold Price	5580
Nifty Call Strike Price	5600
Call Premium	Rs 70    (Call Premium Paid)
Breakeven point	Selling Price of Nifty - Premium Paid

Reward Potential

Ø  Profit = Unlimited

Ø  Profit Achieved When Settlement Price of Nifty < Selling Price of Nifty i.e. 5580 - Call Option Premium i.e.70

Ø  Maximum Profit = Selling price of Nifty - Settlement Price of Nifty – Premium Paid

Risk Potential

                                               

Ø  Max Loss = Call Option Premium Paid + Brokerage(s) + Statutory Charges

Ø  Loss occurs= When Settlement Price of Nifty = Strike Price of Call Option i.e 5600

Nifty Closing Price @	Profit/Loss
5400	5500 (Profit)
5500	500 (Profit)
5600	4500 (loss)
5700	4500 (Loss)
5800	4500 (Loss)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5600 Call Option for Rs 70/- and a Nifty Apr Futures Sold for Rs 5580. The net premium paid to enter the trade is Rs 3500 ((Call Option Premium) X 50 Lot size) and difference or Rs 20/- for nifty futures sold @ 5580 which is Rs 4500 maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 Call will expires out of the money and, Subtracting the premium paid of Rs 70, Nifty Short Futures will yield a profit of Rs 80 but at the same time Call Option premium would be in a loss of Rs 70 resulting in overall profit of Rs 10

On expiration in April, if Nifty is trading at 5700, Call option will remain in the money and earn Rs 100 and futures position would have a loss of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot).

 Investor will make a loss of

Nifty Short Futures : Rs 6000 Loss (Nifty Sold Price – Nifty Settlement Value ) X 50 Lot Size

Nifty 5500 Call       : Rs 1500 Profit (Exercised Value Rs 100 – Premium Paid Rs 70) X 50 Lot Size

Synthetic Long Call

Synthetic Long Call

Synthetic Long Synthetic is a strategy to be used when the option trades is concerned about the near term downside risk

This strategy involves buying a Put Option, while owning shares in the same underlying or Index , it is a strategy with a limited loss and (after subtracting the Put premium) unlimited profit.

Long Synthetic behaves exactly the same as being a long call

Nifty Synthetic Long Call

Buy 1 lot Nifty Futures or Stock

Buy 1 ATM Index Put

Investor View: Bullish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Higher Breakeven:  Purchase Price or Index/Stock + Put Premium paid + brokerage + Statutory charges

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Spot Price	5580
Nifty Put Strike Price	5600
Put Premium	Rs 70    (Put Premium Paid)
Breakeven point	Purchase Price of Nifty + Premium Paid

Reward Potential

• Profit = Unlimited
• Profit Achieved When Settlement Price of Nifty > Purchase Price of Nifty i.e. 5580 + Put Option Premium i.e.70
• Maximum Profit = Settlement Price of Nifty – Purchase price of Nifty – Premium Paid

Risk Potential

•  Max Loss = Put Option Premium Paid + Brokerage(s) + Statutory Charges
•  Loss occurs= When Settlement Price of Nifty <= Strike Price of Put Purchased i.e 5600

Nifty Closing Price @	Profit/Loss
5400	3500 (Loss)
5500	3500 (Loss)
5600	3500 (Loss)
5700	2500 (Profit)
5800	7500 (Profit)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5500 put for Rs 70/- and a Nifty Apr Futures for Rs 5580. The net premium paid to enter the trade is Rs 2500 ((Put Option Premium) X 50 Lot size), which is also his maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 put will expires in the money and will possess intrinsic value of Rs 100, Subtracting the premium paid of Rs 70, Put option will yield a profit of Rs 30 but at the same time Futures position would be in a loss of Rs 30 resulting in overall loss of premium paid

On expiration in April, if Nifty is trading at 5700, Put option will expire worthless and futures position would yield a profit of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot) , Investor will make a profit of Rs 2500/-

Short Straddle - Neutral Strategy

Short Straddle:

Short Straddle is the exactly opposite of Buy Straddle. It is used when the option trader is expecting underlying to show no large movement. Investor expects the underlying to show little volatility Upside or Downside. In this Strategy Investor is credited with a premium since he or she writes the call and put on the same underlying for the same maturity and StrikePrice

By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone. But that comes at a cost. You have unlimited risk on the upside and substantial downside risk

Nifty Options Short Straddle

Sell 1 ATM Index Call

Sell 1 ATM Index Put

Investor View: Neutral direction but expecting little volatility in underlying movement.

Risk: Unlimited.

Reward: Limited to the premium received.

Higher Breakeven: Strike Price + net premium received.

Lower Breakeven: Strike Price - net premium received.

Illustration

Index	Nifty
Nifty Lot Size	50
Underlying Strike Price	5500
Call Premium	Rs 81    (Call Premium Received)
Put Premium	Rs 50    (Put Premium Received)
Higher Breakeven Point	Rs 5639 (Strike Price+Call Put premium received)
Lower Breakeven Point	Rs 5367 (Strike Price–Call Put premium received)

Nifty Short Straddle Payoff Diagram

Reward Potential

• Profit = Limited
• Profit Achieved When Settlement Price of Nifty < Strike Price of Long Call i.e. 5500 + Net Premium Received i.e. 131 OR Nifty Settlement Price < Strike Price of Long Put i.e. 5500 - Net Premium received i.e. 131
• Maximum Profit = Settlement Price of Nifty = Strike Price of Short Call / Short Put

Risk Potential 

• Max Loss = Unlimited
• Max Loss Occurs When Settlement Price of Nifty  = Price of Nifty - Strike Price of Short Call i.e. 5500 - Net Premium Received i.e. 131 OR Strike Price of Short Put i.e5500 – Settlement Price of Nifty - Net Premium Received i.e 131 + (Brokerage + Statutory Charges Paid)

Nifty Closing Price @	Profit/Loss
5300	3450 (Profit)
5400	1550 (Profit)
5500	6550 (Profit)
5600	1550 (Profit)
5700	3450 (Profit)

Example:

Let us assume Nifty is trading at 5510 in Apr 2013. An options trader enters a Short straddle by buy Selling a Apr 5500 put for Rs 50/- and a Apr 5500 call for Rs 81. The net premium received to enter the trade is Rs 6550 ((Call Option Premium + Put Option Premium) X 50 Lot size), which is also his maximum possible profit.

If Nifty is trading at 5600 on expiration in April, the Apr 5500 put will expire worthless but the April 5500 call expires in the money and will possess intrinsic value of Rs 100,Subtracting the premium received of Rs 131, the long straddle trader's profit comes to Rs 31 X 50 Lot size i.e Rs 1550

On expiration in April, if Nifty is still trading at 5500, both the Apr 5500 put and the Apr 5500 call expire worthless and the short straddle trader  receives a maximum profit which is equal to the actual premium received Rs 6550 ((Call Option Premium + Put Option Premium) X 50 Lot size)  taken to enter the trade.

For More Information about other strategies kindly click on below links
Guide To Options Basics
Long Call
Long Put
Short Call 
Short Put
Long Straddle
Short Straddle
Synthetic Long Call