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
Peter December 3rd, 2010 at 8:12pm
Not the same as a long call - the same as a long stock.
varatha December 3rd, 2010 at 1:25pm
this one is for long call stratergy
Peter August 8th, 2010 at 3:10am
It's no more risky than having a long position in the underlying asset.
deepak August 8th, 2010 at 1:25am
this is very risky.if market goes upside den its ok but wat about downside...
Peter August 4th, 2010 at 2:51am
Hi Narender, this strategy doesn't provide downside protection. It would be used to replicate a long position in an underlying potentially without the capital outlay required.
narender August 4th, 2010 at 12:50am
sir
if market fall dawn then how this stretgi save us
Peter September 12th, 2009 at 7:33am
Sorry...I don't understand your question. Are you saying that selling one put option is that same as buying 2 call options (which it's not)?
Trader09 September 12th, 2009 at 12:00am
Being new into this had little confusion over this strategy.Wats the need to sell one put option when 2 call options wud have meant same thing, as selling an option i suppose entitles u to unlimited risk, whereas buying does not...
Wardo February 9th, 2009 at 2:56pm
I executed a successful synthetic long at the March $22.50 strike for Peabody Energy, symbol BTU. My question is now what? I want to lock in some profit and stay long. With the underlying at $29-30, my $22.50 call has little premium left in it. Whereas say the March $30 calls are $2.50 ask. Any creative thoughts/ideas?
Admin February 8th, 2009 at 3:36am
Hi Chaser,
If you were to buy the underlying stock you would have to outlay the entire cash to hold the stock. I.e. if the stock was trading at $25, then 100 shares would require you to spend $2,500. However, say you looked at the $25 synthetic with 30days to expiration and 5% interest rates, a call may be trading at 0.76 and the put at 0.63.
So, a long call ($76 debit) minus short put ($63 credit) means the same position only costs $13.
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