Short vs synthetic short
Technically, the choice between futures and options should be based on reward-risk trade-off. If you are confident that the underlying is likely to decline, you may want to short futures, as futures price moves nearly one-to-one with the underlying. Your confidence on the price movement comes from reading the chart. If the pattern is strong, your confidence level would be higher. So, by logical extension, if your confidence on the price movement is not high, you may want to use options. The argument is that going long on an option limits your maximum loss to the premium paid. That said, experienced traders may still prefer shorting futures with a strict stop-loss.
So, what is synthetic short? It involves going long on an at-the-money (ATM) put and short on an ATM call of the same expiry on an underlying. The position is called synthetic short because it behaves like a short underlying. If the underlying declines, the put will generate gains, as it will become in-the-money (ITM). If the underlying moves up instead, the short call will generate losses, as it will become ITM. The synthetic short will give the same payoff as a short underlying if two conditions are met. One, the premium paid on the long put can be exactly offset by the premium received on the short call. And two, the strike is equal to the underlying price. But these two conditions are unlikely to be met most of the time. Often, the cost of the put may be higher than the premium received on the call because the chosen strike may be marginally higher than the underlying. So, the synthetic short position may offer lower gains. Also, the effect of net time decay can dampen gains. So, why setup a synthetic short position?
Traders may prefer synthetic short position just after the underlying has paused after a sharp uptrend. At that time, calls would be in high demand compared to puts. So, call implied volatility is likely to be higher than that of put implied volatility. By setting up the synthetic short, traders are betting that decline in the underlying will lead to intrinsic value gains from the put. Also, the time decay gains from the call will be accelerated if implied volatility declines.
Optional reading
Synthetic short position exposes you to similar risk as short futures. Also, the cash outflow on the synthetic short position is higher because it includes margins on the short call and the premium paid on the long put. It is, therefore, optimal to initiate short futures than synthetic short position for a given negative outlook on the underlying.
(The author offers training programmes for individuals to manage their personal investments)
Published on March 7, 2026