The investor can use a different variation of the ‘Synthetic Short Stock’ strategy to set up an aggressive position.
Rather than using the same strike price for the puts and calls, the investor can use a higher strike price for the call option and a lower strike price for the put option, both of the same underlying stock and same expiry.
By splitting the strike prices between the calls and puts, the investor can set up a more aggressive position than the traditional Synthetic Short Stock.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 OTM Put
Leg 2 – Sell 1 OTM Call
Credit Spread/Debit Spread
This depends on the price of the call and put options.
If the premium of the put option is higher than the call option, then such a strategy would be a Debit Spread.
If the premium of the put option is lower than the call option, then such a strategy would be a Credit Spread.
This strategy has unlimited profit potential.
When is this strategy profitable?
Unlike the regular Synthetic Short Stock strategy, a stronger downward movement in the price of the underlying security is necessary to produce a profit for the investor in this strategy.
The investor faces unlimited risk in this strategy.
When is this strategy unprofitable?
The investor stands to face large losses if the price of the underlying security rise sharply.