The Sell Put And Buy Call Strategy | A Synthetic Long Stock (2024)

FAQs

The Sell Put And Buy Call Strategy | A Synthetic Long Stock? ›

The 'Sell Put And Buy Call' strategy, the sell of an ATM put coupled with the purchase on an ATM call, is a way of creating a synthetic long stock position. It requires a lower capital outlay than simply purchasing the stock, but also exposes you to the same risk.

Putting on a synthetic long position means buying at-the-money call options and selling put options at the same strike price and expiration. This strategy has a bullish outlook because the maximum profit is unlimited, while downside risk increases until the asset price goes to zero.

A Synthetic Call option strategy is when a trader is Bullish on long term holdings but is also concerned with the associated downside risk. When you're expecting a rise in the price of the underlying and increase in volatility. A long call strategy involves buying a call option only.

Example. If XYZ is trading $100 and is expected to trade higher over the next three months, a trader could buy a 100-strike price call and sell a 100-strike price put for the following price: Buy 1 XYZ 100-strike price call for $4.00. Sell 1 XYZ 100-strike price put for $$3.50.

They are strategies that replicate the profit and loss profile of another strategy, but created in a different way. Typically, the strategy being replicated will involve multiple options positions and the synthetic strategy will use a combination of stocks and options.

A synthetical covered call is made up of a short ATM put plus a long ATM call to replicate the synthetic long stock. Combining a short OTM call replicates the covered call position.

Synthetic long assets come with an unlimited amount of risk; however, they also offer an unlimited potential profit. The synthetic long asset position is a more cost-effective way to trade without tying up all the investment capital required to buy an equivalent number of shares of the underlying stock outright.

The maximum loss is limited but potentially substantial. The worst that can happen is for the stock to become worthless. In that case, the investor would be assigned on the put and would have to buy the stock at the strike price. The loss would be higher (lower) by the amount of the debit (credit).

A covered straddle position is created by buying (or owning) stock and selling both an at-the-money call and an at-the-money put. The call and put have the same strike price and same expiration date. The position profits if the underlying stock trades above the break-even point, but profit potential is limited.

When should you sell a long put option? ›

Selling a put option is a bullish position, as you are betting against the movement of the stock price below your strike price– so, you'd sell a put if you think that the underlying's price will rise. If the underlying's price does, indeed, increase and the short option expires OTM, you'd make a profit.

Maximum profit

The maximum potential profit is equal to the strike price of the put minus the price of the put, because the price of the underlying can fall to zero.

A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.

Ans. A synthetic call or put acts like a regular call or put option, offering the chance for unlimited profit and limited loss, but without needing to choose a specific strike price. Also, synthetic positions help control the risk that comes with cash or futures trading, which can be unlimited if not managed properly.

Cons: Limited lifespan: Calls have a limited lifespan and will expire worthless if the underlying asset's price does not rise above the strike price before the expiration date. Time decay: The value of a call decreases as the expiration date approaches, even if the underlying asset's price remains stable or increases.

To break even on the trade at expiration, the stock price must be below the strike price by the cost of the long put option. For example, if a long put option with a $100 strike price is purchased for $5.00, the maximum loss is defined at $500, and the profit potential is unlimited until the stock reaches $0.

As stated earlier, a trader would buy long puts in anticipation of the price of the underlying stock falling in value. For example, let's assume stock ABC has price of $20 and you think the stock price is going to go down in the next few weeks. You could consider buying a $15 ABC put to profit from this expectation.

If the stock prices increase, David will make unlimited profits as his stock price rises. However, he will lose the premium paid to buy the put option. This is an example of synthetic options.

Consider a stock trading at $81.37. We can create a synthetic short put position with the following trades: Buy 100 shares of the underlying stock for $81.37. Sell one contract of the 80-strike call option for $5.03.