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Options Strategies
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Synthetic Long Stock
| Strategies |
Synthetic Long Stock |
| Component |
Buy call and sell put of the same strike price/level |
| Potential Profit |
- When the stock price/index level is above the break-even point
- Unlimited and equals to stock price/index level minus break-even point
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| Maximum Loss |
- When the stock price/index level is lower than the break-even point
- Substantial, equals to break-even point minus stock price/index level
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| Time Value Impact |
Neutral |
| Break-even |
The strike price/level minus net premium received or the strike price/level plus net premium paid, depends on the strike price chosen |
| Remarks |
Compared with buying shares, the investment cost of the synthetic long stock is lower. However, the portfolio will be subject to the constraints of the maturity of the options. Therefore roll-over costs may be incurred if the investor wishes to hold the position beyond the expiry date of the option contracts. Margin may also be required. The short position might be assigned at anytime before expiry. |
Example
| Component |
Buy ABC Dec $200 Call, pay $30, and sell ABC Dec $200 Put, receive $10 |
| Net Premium |
Pay $30-$10=$20 |
| Break-even |
$200+$20=$220 |
| Profit when |
Stock price is above $220 |
| Potential Profit |
Unlimited, stock price - $220 |
| Potential Loss |
$220 - stock price |
| Time Value Impact |
Neutral |
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