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Synthetic Long Call Option Strategy

The Synthetic Long Call Option Strategy is not affected by the problem of options expiring worthless. The synthetic call is created by a long position underlying and then combined with a long position in an at-the-money put option. There are two types of synthetic options as synthetic calls and synthetic puts. They will require a cash or future position combined with an option. The cash position is the primary position and option is called the protective position. The execution of a synthetic long is simple as to buy the ATM call option, sell the ATM Put option. Synthetic long call strategy has investors and traders who purchase a stock because of the potential for high leverage profits. We mimicked through use of stock and options. From all strategies the most interesting is synthetic long stock.

The name is invented from two positions change in value dollar for dollar with change in 100 shares of stock. The cost to open the position is close to zero and produces a small credit. The options track is close to movement in the stock because time value disappears fast, and extrinsic value will be less in overall premium value as expiration approaches. The synthetic positions can be opened on the short side as it involves buying a put and selling a call. The performance of long stock positions and synthetic long stock positions are identical. Then stock price will increase from the point of entry and both positions are profitable.

Example

We start with the stock price will be at $109.82 with the strike and expiration. The long 110 call for $4.13 with short put of110 for $4.28.Here both options expire in 45 days. The Net Credit is $4.28 in premium which is collected $4.13 in premium paid equal to $0.15 net credit. Then Breakeven Price will be $110 strike price minus $0.15 and net credit equal to $109.85.So maximum Profit Potential is unlimited and maximum loss potential is $109.85 x 100 = $10,985.

Conclusion

The strategy is a long future position on the underlying stock. There is limited potential for appreciation with risk that underlying stock will fall in value.