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Short Call (Naked Call) Vs Synthetic Call Options Trading Strategy Comparison

Compare Short Call (Naked Call) and Synthetic Call options trading strategies. Find similarities and differences between Short Call (Naked Call) and Synthetic Call strategies. Find the best options trading strategy for your trading needs.

Short Call (Naked Call) Vs Synthetic Call

  Short Call (Naked Call) Synthetic Call
Short Call (Naked Call) Logo Synthetic Call Logo
About Strategy Short Call (or Naked Call) strategy involves the selling of the Call Options (or writing call option). In this strategy, a trader is Very Bearish in his market view and expects the price of the underlying asset to go down in near future. This strategy is highly risky with potential for unlimited losses and is generally preferred by experienced traders. The strategy involves taking a single position of selling a Call Option of any type i.e. ITM or OTM. These naked calls are also known as Out-Of-The-Money Naked Call and In-The-Money Naked Call based on the type you choose. This strategy has limited rewards (max profit is premium received) and unlimited loss potential. When the trader goes short on call, the trader sells a call option and e... Read More A Synthetic Call strategy is used by traders who are currently holding the underlying asset and are Bullish on it for the long term. But he is also worried about the downside risks in near future. This strategy offers unlimited reward potential with limited risk. The strategy is used by buying PUT OPTION of the underlying you are holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT OPTION.
Market View Bearish Bullish
Strategy Level Advance Beginners
Options Type Call Call + Underlying
Number of Positions 1 2
Risk Profile Unlimited Limited
Reward Profile Limited Unlimited
Breakeven Point Strike Price of Short Call + Premium Received Underlying Price + Put Premium

When and how to use Short Call (Naked Call) and Synthetic Call?

  Short Call (Naked Call) Synthetic Call
When to use?

It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.

A Synthetic Call option strategy is when a trader is Bullish on long term holdings but is also concerned with the associated downside risk.

Market View Bearish

When you are expecting the price of the underlying or its volatility to only moderately increase.

Bullish
Action
  • Sell Call Option

  • Buy Underlying
  • Buy Put Option

The strategy is used by buying PUT OPTION of the underlying you're holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT OPTION.

Breakeven Point Strike Price of Short Call + Premium Received

Break even is achieved when the price of the underlying is equal to total of strike price and premium received.

Underlying Price + Put Premium

Compare Risks and Rewards (Short Call (Naked Call) Vs Synthetic Call)

  Short Call (Naked Call) Synthetic Call
Risks Unlimited

There risk is unlimited and depend on how high the price of the underlying moves.

Limited

Maximum loss happens when price of the underlying moves above strike price of Put.

Max Loss = Premium Paid

Rewards Limited

The profit is limited to the premium received.

Unlimited

Maximum profit is realized when price of underlying moves above purchase price of underlying plus premium paid for Put Option.

Profit = (Current Price of Underlying - Purchase Price of Underlying) - Premium Paid

Maximum Profit Scenario

When underline asset goes down and option not exercised.

  • Max Profit = Premium Received
  • Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Underlying goes up

Maximum Loss Scenario

When underline asset goes up and option exercised.

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
  • Loss = Price of Underlying - Strike Price of Short Call - Premium Received

Underlying goes down and option exercised

Pros & Cons or Short Call (Naked Call) and Synthetic Call

  Short Call (Naked Call) Synthetic Call
Advantages

This strategy allows you to profit from falling prices in the underlying asset.

Provides protection to your long term holdings.

Disadvantage

There's unlimited risk on the upside as you are selling Option without holding the underlying.

Rewards are limited to premium received only.

You can incur losses if underlying goes down and the option is exercised.

Simillar Strategies Covered Put, Covered Calls, Bear Call Spread Married Put







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