The Synthetic Long Stock is an options strategy used to simulate the payoff of a long stock position. It is entered by buying at-the-money calls and selling an equal number of at-the-money puts of the same underlying stock and expiration date.
Buy 1 call; Sell 1 put. Use the same strike price and expiration date.
This is an unlimited profit, limited risk options trading strategy that is taken when the options trader is bullish on the underlying security but seeks a low cost alternative to purchasing the stock outright.
Unlimited Profit Potential
Similar to a long stock position, there is no maximum profit for the Synthetic Long Stock. 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 if the underlying stock price takes a dive.
Additionally, a debit is usually taken when entering this position since calls are generally more expensive than puts. Hence, even if the underlying stock price remains unchanged on expiration date, there will still be a loss equal to the initial debit taken.
Strike price plus any net premium paid, or minus any net premium received. This occurs if the stock falls to zero.
Breakeven Point(s)
Strike price plus any net premium paid, or minus any net premium received. Disregard a result below zero.
Example
Suppose XYZ stock is trading at $40 in June. An options trader setups a Synthetic Long Stock by selling a JUL 40 put for $100 and buying a JUL 40 call for $150. The net debit taken to enter the trade is $50.
If XYZ stock rallies and is trading at $50 on expiration in July, the short JUL 40 put will expire worthless but the long JUL 40 call expires in the money and has an intrinsic value of $1000. Subtracting the initial debit of $50, the options trader's profit comes to $950. Comparatively, this is very close to the profit of $1000 for a long stock position.
On expiration in July, if XYZ stock is instead trading at $30, the long JUL 40 call will expire worthless while the short JUL 40 put will expire in the money and be worth $1000. Buying back this short put will require $1000 and together with the initial $50 debit taken when entering the trade, the trader's loss comes to $1050. This amount closely approximates the $1000 loss of the corresponding long stock position.
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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 (Split Strikes)
There is a less aggressive version of this strategy where both the call and put options involved are out-of-the-money. While a larger upside movement of the underlying stock price is required to accrue large profits, this alternative strategy does provide more room for error.
Synthetic Short Stock
The companion strategy to the Synthetic Long Stock is the Synthetic Short Stock. Unlike the Synthetic Long Stock which merely simulates the long stock position, the Synthetic Short Stock is deemed to be superior to the actual short sale of the underlying for a number of important reasons.
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.
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.
Advanced Strategy Variations
Build on the core strategies with these less common structures. Match the option legs and expirations when comparing names.
