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Synthetic Call Options Trading Strategy Explained

Published on Wednesday, April 18, 2018 | Modified on Wednesday, June 5, 2019

Synthetic Call

Synthetic Call Options Strategy

Strategy LevelBeginners
Instruments TradedCall + Underlying
Number of Positions2
Market ViewBullish
Risk ProfileLimited
Reward ProfileUnlimited
Breakeven PointUnderlying Price + Put Premium

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.

When to use Synthetic Call strategy?

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

Example

Suppose you are bullish about TCS currently trading at ₹3,400. But you are also concerned with losses in case TCS stock price move downwards. In such a scenario, synthetic call strategy can be executed by buying TCS stock at current market price. To protect against fall in the price of TCS, you buy a Put option with a strike price ₹3300 at a premium of ₹150.

Current Market Price of TCS Stock₹3,400
Put Option Strike Price₹3,300
Option Lot Size75
Premium Paid₹150
Break Even Point
(Purchase Price of Underlying + Premium Paid)

3,550
Synthetic Call Option Strategy Payoff Schedule
TCS Stock Price on Expiry (₹)Payoff from TCS StockPayoff from Put Option
(BEP-CP)
BEP = 3,250
MAX LOSS=11,250
Net Payoff(₹)
3100-2250011250-11250
3200-150003750-11250
3300-7500-3750-11250
34000-11250-11250
35007500-11250-3750
355011250-112500
370022500-1125011250
380030000-1125018750

Scenario 1: If the stock prices rise, you will make unlimited profits as the stock price you hold goes up. You will lose the premium paid to buy the put option.

Scenario 2: If the stock prices fall, then the loss is covered by the Put Option. The loss incurred in stocks you hold will be compensated by rising profits from Put Options.

As shown in below chart, the net position remains profitable to the investor.

synthetic long call options strategy nifty payoff chart

Market View - Bullish

Actions

  • 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

Underlying Price + Put Premium

Risk Profile of Synthetic Call

Limited

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

Max Loss = Premium Paid

Reward Profile of Synthetic Call

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

Max Profit Scenario of Synthetic Call

Underlying goes up

Max Loss Scenario of Synthetic Call

Underlying goes down and option exercised

Advantage of Synthetic Call

Provides protection to your long term holdings.

Disadvantage of Synthetic Call

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

How to exit?

  • Sell the underlying on profit.
  • Wait for Option to expire.

Simillar Strategies

Married Put

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