Stock Markets Exposed
What is this options strategy?
I have a specific option strategy question. A stock trades around 55. Someone does a bear put spread buying the 55 put and selling the 55 put at the same expiration. At the same time and same expiration, a 60 call is purchased and a 55 call is sold. So now we have 4 options: 1. Buy APR 55 PUT 2. Sell APR 50 PUT 3. Buy Apr 60 Call 4. Sell Apr 55 call. What is the point of this strategy?
Public Comments
- What you described is a synthetic short fence. The combination of the long put and the short call with the same expiry and strike price is a synthetic short stock position since it has the same risk-reward characteristics as a short stock position. A short fence is a short position in the underlying, a long call at a higher strike and a short put at a lower strike. It is a limited risk/limited reward strategy. If held until expiration, the maximum profit occurs if the underlying is at or below the lowest strike price, and the maximum loss occurs if the underlying is at or above the highest strike price. For all practical purposes the risk-reward of the entire spread is eqivalent to the risk-reward of a bearish vertical spread with strike prices of $60 and $50. You could construct the bearish vertical spread either by Buying a call with a $60 strike and selling a call with a $50 strike or by Buying a put with a $60 strike and selling a put with a $50 strike.
