You can create synthetic stock positions by using options. That is, either by buying a call and selling a put (to simulate a long stock position) or by selling a call and buying a put (to simulate a short stock position) in a 1-to-1 ratio to generate similar returns to owning a “real” stock position but by risking far less.

But did you know that you could also simulate a call or a put option position by using a combination of stock and the opposite type of option? (That is, you can create a call with the stock and a put, or simulate a put with the stock and a call.)

Because it’s wise to have a balance of bullish and bearish positions in your trading account, let’s examine how we can establish synthetic put positions.

You can simulate both long puts and short puts with a combination of stock (whether long or short) and call options (again, either long or short, depending on the desired result).

As you may know, a long put is a bearish strategy whereby you are expecting the stock price to drop below the strike price of the option you buy. When purchasing a put, the most you can lose is what you invest, and the upside can be unlimited.

A traditional short put is a bearish strategy, as when you write (or sell to open) a put option, you’re looking for the stock to go up. As with any short position established without some type of hedge (which we’ll talk about momentarily), the traditional short put can carry substantial risk.

To create a similar risk/reward scenario as buying a put but with a synthetic long put position, you can short the stock — a risky maneuver when done on its own — and couple it with a long call position.

For example, if you buy an XYZ December 50 Call and short the stock against it, the risk/reward scenario is similar to owning the XYZ December 50 Put. Here, you’re looking for the stock to go down, but if it spikes through $50, but your downside is halted.

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Because the long call would be in-the-money, it would allow you to buy stock at the strike price (i.e., below market value) and effectively limit your losses if you are forced to cover your short sale of the stock.

If the position works in your favor, the short sale would become the profitable “leg” of the trade because if the stock goes to $35 and you had bought it at $45, you would “cover” that short by buying shares at $35 and pocketing the $10-per-share profit.

The call would then expire worthless, but for probably a couple dollars’ worth of protection, the investment in this “insurance policy” would have been worth it.

As for the synthetic short put strategy, it bears resemblance to a strategy with which you may be familiar — the covered call. With this type of investment, you buy the stock and short a call against it.

Both strategies aim to take advantage of a flat trading environment by helping you collect a premium from the sale of the calls and effectively make your stock work harder for you.

If you bought a stock during the recent market pullback and it was a terrific bargain, the synthetic short put strategy might be a short-term investment strategy worth considering, as you could short a call at a higher strike price than the market value.

If the value of the stock goes up, that’s a profit stream for the investor. If the stock stays relatively neutral, the profit comes from the premium collected from the short sale of the call. But if the stock falls dramatically, the hit that the long stock could take probably can’t be offset by the premium collected for the short call.

If the position succeeds (i.e., if the stock continues to trade flat), not only can you profit from the synthetic short-put position you’ve created, but as the owner of the stock, you’re also entitled to any dividends the underlying instrument may pay.

There are many trading strategies that have been designed to help you profit in the options markets, and the more weapons you add to your trading arsenal, the better-prepared you’ll be to make memorable returns in any type of market!

If you enjoyed this article, check out Dawn Pennington’s “Synthetic Call Options Similar to Real Deal” and “Generate Real Profits Synthetically.”