Long Synthetic
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $45 | Call | $1.29 |
| Sell 1 | $45 | Put | $1.29 |
| Net | $0 | ||
A long synthetic is buying a call and selling a put with the same strike price in the same expiration month. It is called a synthetic as the profile replicates a long position in the underlying. As a result;
The Max Loss increases as the market falls but like a long stock position is ultmately limited to the total investment of the position. In this case it is limited to the value of the position at the strike price. I.e in this example it would be -$4,500.
The Max Gain is uncapped as the market rises.
Characteristics
When to use: When you are bullish on market direction.
Long Synthetic behaves exactly the same as being long the underlying security. You can use long synthetic's when you want the same payoff characteristics as holding a stock or futures contract. It has the benefit of being much cheaper than buying stock outright.
Long Synthetic Greeks
Delta
Gamma
Vega
Theta
32 Comments
vkong July 11th, 2011 at 10:41am
I don't understand how there is an unlimited loss to this strategy unless unlimited means to the max loss of the writer in the amount of the sell put minus his premium.
dd008 April 20th, 2011 at 4:17am
It's best used when you are bullish on the market plus it tends to be cheaper.
Peter March 2nd, 2011 at 5:42pm
Wouldn't that just be a long bond plus a short call option? That gives the same payoff profile as a short put.
GEH4 March 2nd, 2011 at 4:35pm
Can you structure a synthetic put on long bond that replicates an interest rate cap?
Peter January 17th, 2011 at 5:29am
Yes, short options are riskier that long options as you give away the right to exercise, however, short calls are often used in conjunction with a long position in the underlying stock for an income generation strategy.
rohit January 16th, 2011 at 12:04pm
why should one go for shorting the call if he could have a unlimited profit by taking long position in put
Peter January 13th, 2011 at 4:18pm
Hi Bkrish, a short put with a long call is a long synthetic and hence has unlimited downside risk. Two long calls, however, will have a limited risk on the downside totalling the amount of premium paid for the two options.
Bkrish January 7th, 2011 at 4:43pm
what is the advantage in going for one short put with one long call over two long calls?
Peter December 4th, 2010 at 3:49am
Right - a short put doesn't have any downside protection. However, not sure what you mean when you say that you lost your call premium?
Gulshan December 4th, 2010 at 2:57am
When i will short put then i have to give margin to the broker and in downside i will lost my call premium as well as the amount of put (which can be unlimited) This strategy does not give any downside protection.
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