The Synthetic Long Stock (Split Strikes) is a less aggressive version of the Synthetic Long Stock.
The Synthetic Long Stock (Split Strikes) position is created by buying slightly out-of-the-money calls and selling an equal number of slightly out-of-the-money puts of the same underlying stock and expiration date.
Sell 1 put at the put strike price; Buy 1 call at the call strike price. Use the same expiration date.
The split strike version of the Synthetic Long Stock strategy offers some downside protection. If the trader's outlook is wrong and the underlying stock price falls slightly, he will not suffer any loss. On the flip side, a stronger upside move is needed to produce a profit.
Profits and losses with a split strike strategy are also not as heavy as a corresponding long stock position as the strategist has traded some potential profits for downside protection.
Unlimited Profit Potential
Similar to a long stock position, there is no maximum profit for the Synthetic Long Stock (Split Strikes). The options trader stands to profit as long as the underlying stock price goes up.
Unlimited as the stock price rises.
Loss potential
Like the long stock position, heavy losses can occur for the Synthetic Long Stock (Split Strikes) if the underlying stock price takes a dive.
Often, a credit is taken when establishing this position. Hence, even if the underlying stock price remains unchanged on expiration date, there will still be a profit equal to the initial credit taken.
Put strike price plus net opening cost.
Breakeven Point(s)
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Net opening cost plus put strike price. Use this result only if it is at or below the put strike price.
- Prices between the put strike price and the call strike price all break even only when the net opening cost equals zero.
- Net opening cost plus call strike price. Use this result only if it is at or above the call strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader setups a split-strikes Synthetic Long Stock by selling a JUL 35 put for $100 and buying a JUL 45 call for $50. The net credit taken to enter the trade is $50.
Scenario #1: XYZ stock price rises moderately to $45
If the price of XYZ stock rises to $45 on expiration date, both the long JUL 45 call and the short JUL 35 put will expire worthless and the trader keeps the initial credit of $50 as profit.
Scenario #2: XYZ stock rallies explosively to $60
If XYZ stock rallies and is trading at $60 on expiration in July, the short JUL 35 put will expire worthless but the long JUL 45 call expires in the money and has an intrinsic value of $1500. Including the initial credit of $50, the options trader's profit comes to $1550. Comparatively, a corresponding long stock position would have achieved a larger profit of $2000.
Scenario #3: XYZ stock price crashes to $20
On expiration in July, if the price of XYZ stock has instead crashed to $20, the long JUL 45 call will expire worthless while the short JUL 35 put will expire in the money and be worth $1500. Buying back this short put will require $1500 and subtracting the initial $50 credit taken when entering the trade, the trader's loss comes to $1450. A heavier loss of $2000 loss would have been suffered by a corresponding long stock position.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Synthetic Long Stock
There is a more aggressive version of this strategy where both the call and put options involved are at-the-money. While a smaller upside movement of the underlying stock price is required to accrue large profits, this alternative strategy provides less room for error.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
