Synthetic Call Option Trading Strategy Explained

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

Synthetic Call Options Strategy

Strategy Level	Beginners
Instruments Traded	Call + Underlying
Number of Positions	2
Market View	Bullish
Risk Profile	Limited
Reward Profile	Unlimited
Breakeven Point	Underlying 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 Rs 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 Rs 3300 at a premium of Rs 150.

Current Market Price of TCS Stock	Rs 3,400
Put Option Strike Price	Rs 3,300
Option Lot Size	75
Premium Paid	Rs 150
Break Even Point (Purchase Price of Underlying + Premium Paid)	3,550

**Synthetic Call Option Strategy Payoff Schedule**
TCS Stock Price on Expiry (Rs )	Payoff from TCS Stock	Payoff from Put Option (BEP-CP) BEP = 3,250 MAX LOSS=11,250	Net Payoff(Rs )
3100	-22500	11250	-11250
3200	-15000	3750	-11250
3300	-7500	-3750	-11250
3400	0	-11250	-11250
3500	7500	-11250	-3750
3550	11250	-11250	0
3700	22500	-11250	11250
3800	30000	-11250	18750

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

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

Max Loss = Premium Paid

Reward Profile of Synthetic Call

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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