A combination of a short call and a long put in addition to a money market position (borrowing or lending for short periods at a risk-free rate). This strategy offers a good alternative to short selling. On the one hand, it enables a trader to effectively short a firm’s shares without being exposed to the risks associated with short selling. This is instrumental for traders who will take positions in a company whose shares are hard to borrow.
On the other hand, in shorting a stock, short sellers need to pay dividends insofar as they deal directly with the stock. A synthetic short frees traders from such unsolicited burdens.
