It is certainly true that a synthetic short (buying a put and selling a call) has the same P&L vs. stock price curve as a regular short position if you hold the options to expiration. But I wonder about a range of other differences between these two strategies.
<b>1) Is the net delta of a synthetic short always -1?</b> Does the P&L for a synthetic short only match that of a regular short position on the expiration date? Would volatility impact the open P&L for a synthetic short differently than it would for a regular short position? Would a synthetic short provide the same opportunity for exploiting very short-term price drops?
<b>2) What about bid-ask spreads? </b> The bid-ask spreads on options seem much worse than the bid-ask spread for most stocks. This would lower the profitability of synthetic shorting.
<b>3) What about timing issues in entering or exiting a synthetic short? </b> If the stock price is moving rapidly, the timing of the two halves of the synthetic short transaction would expose the trader to these movements (it is a risk as the timing could be favorable or unfavorable).
<b>4) Are the margin requirements the same for both strategies? </b> Aside from account type issues, both shorting and options trading have specific requirements about margin. But are they equivalent when all is said and done?
<b>5) Can assignments screw up or improve a synthetic short? </b> If the person who bought the call decides to exercise the option, then the synthetic short trader (a diminutive android???
) is left holding a put. Or, might the trader chose to exercise the purchased put under some conditions (an extreme down-move of the stock) and be left with a deep, out-of-the-money naked call???
Please correct any misconceptions that I might have here. I don't trade options, don't really plan to trade options, but do like to understand how they work and whether I should trade options.
An open mind seeking eye-opening replies,
Traden4Alpha
