Simple Synthetic Long Strategies [Synthetic Long Call vs. Synthetic Long Put]

Synthetic long strategies allow investors to replicate traditional options positions using a combination of stock and options. These trades provide flexibility in managing risk and adjusting market exposure. Whether you’re curious about a synthetic long call for bullish moves or a synthetic long put for a bearish market, this article explains what a synthetic long is and how it works.

Key takeaways

• A synthetic long call strategy replicates a call option by combining ownership of the underlying stock with a long put, maintaining upside potential while capping downside risk.
• A synthetic long put strategy mimics a put option by shorting the underlying stock and purchasing a call option, benefiting from price declines while limiting losses on upward moves.

Synthetic Long Call

A synthetic long call strategy allows investors to mimic the payoff of a traditional call option without purchasing one outright. It works by pairing ownership of the underlying asset with the purchase of put options. This setup provides unlimited profit potential if the stock price rises, while downside risk is capped.

The typical P&L of a synthetic call (or “married put,” as we call it on our screener) will normally look like this:

Notice the capped loss risk and the potentially unlimited profit potential. The points below will tell you more about how this strategy works (and we’ll also share a real-market example later in the article).

How It Works

• The investor starts by buying shares of the underlying stock.
• At the same time, they purchase at-the-money put options on the same stock.
• If the stock price increases, the investor benefits from the stock’s growth.
• If the stock price falls, the put option acts as “insurance,” limiting losses to the option’s strike price plus the premium paid.

This synthetic long call strategy replicates the benefits of a long call while maintaining certain advantages of stock ownership, such as dividends and voting rights.

Benefits

• Downside Protection: The put option creates a safety net, protecting against significant stock depreciation.
• Unlimited Upside: Gains remain unlimited if the stock price rises.
• Ownership Perks: Investors retain voting rights and can earn dividends while holding shares.

Risks

• Premium Costs: The price of the put option increases the overall cost of the strategy.
• Limited Profit Margin: Gains are slightly reduced by the upfront cost of the put premium.
• Management Complexity: Monitoring both stock and option positions may feel tedious for some investors.

Synthetic Long Put

What is a synthetic put? A synthetic long put strategy lets investors replicate the payoff of a traditional put option without buying it directly. By combining a short stock position with the purchase of call options, this approach hedges against upward price movements while aiming to profit when the stock price falls.

This was the simple explanation of what a synthetic put is. The typical P&L graph of a synthetic put (or “married call,” as we call it on the screener) often looks like this:

The first thing you should understand about this synthetic long position is the uncapped profit potential and the controlled risk of loss. As you can see, this graph looks like that of a long put, but you actually did not purchase any put option to get here. How does it work? Let’s clarify a few aspects below.

How It Works

• The investor begins by shorting the underlying stock, betting on its price decline.
• Simultaneously, they purchase at-the-money call options on the same stock to protect against an unexpected price increase.
• If the stock price drops, the short position generates profit. If the price rises, losses are limited to the call option’s strike price plus the premium paid.

Benefits

• Risk Management: Caps potential losses from a rising stock price, providing a layer of protection.
• Bearish Profits: Offers profit opportunities in falling market conditions.
• Hedging Capabilities: Mitigates risk from unexpected price movements.

Risks

• Premium Costs: Call options come with an upfront cost, which lowers potential profits.
• Rising Prices: A significant upward price move could still lead to losses, albeit limited.

For those curious about what a synthetic put is, this strategy delivers a creative way to hedge while targeting bearish gains. Compared to the synthetic long call, it provides a unique angle for managing risk and pursuing opportunities in declining markets.

A Real-Market Example

Let’s take a look at a synthetic call example coming from our options screener (once again, keep in mind that the strategy will be called “married put” on our website). Suppose you’re bullish on Oracle (ORCL), currently trading at $171.23. You want to invest in 100 shares. Here are three possible moves:

Trade 1: Buy 100 Shares

You could directly buy 100 shares of ORCL for $171.23 each. This would cost $17,123. While this move gives you full ownership (and benefits like dividends and voting rights), it carries significant risk. Should the stock price drop sharply, your losses would be proportional to the decline in value.

Trade 2: Buy a Long Call

Instead of investing over $17,000 upfront, you could simulate a similar market exposure by purchasing a call option. For example, a long call tied to 100 ORCL shares might cost around $1,300. This is the P&L graph of your long put strategy:

This synthetic long position limits your total investment, and if things go south, your losses are confined to the premium you paid. However, it doesn’t provide ownership perks like dividends, because you don’t actually own any ORCL shares.

Trade 3: Create a Synthetic Long Call

This option combines buying 100 shares of ORCL with purchasing a $170 put option that expires in a few weeks. And here is the P&L graph of your synthetic long call:

Take a look at the chart above. Notice that this is pretty much the shape of a long call. Here’s how it works:

• If ORCL’s price rises, you benefit from unlimited upside as a shareholder. 
• If the price falls, the long put caps your maximum loss. 
• In this specific case, your maximum loss would be $548. This is no magic: if ORCL’s price drops, the rise in the put’s value will offset most of your losses.

So, to recap, your maximum loss would be:

• Over $17,000 if you simply bought 100 ORCL shares;
• Over $1,300 if you bought a $170 call expiring in a few weeks;
• Over $500 if you chose a synthetic long call.

This is the synthetic long call strategy in action. You maintain stock ownership (and receive dividends) while protecting yourself against sharp declines.

By understanding what a synthetic long is—and comparing strategies like the synthetic long call and synthetic long put—you can see how options enhance flexibility in real-market scenarios while managing risk effectively. Would you take this approach for ORCL or a stock you’re bullish about? That’s up to you, but make sure you consider all the possible trades for a given investment idea.

Synthetic Call vs. Synthetic Put Strategies

Now that you saw both strategies, it’s clear that the synthetic long call and synthetic long put serve different purposes depending on your market outlook. Here’s how they compare:

Key Differences

• A synthetic long call is best for bullish investors. It involves owning stock and purchasing put options to hedge against losses while maintaining upside potential.
• A synthetic long put works for bearish expectations. It combines shorting stock with buying call options to guard against rising prices.

When to Use Each Strategy

• Synthetic Long Call: Use this when you believe a stock will rise sharply but want to limit downside risk.
• Synthetic Long Put: This is helpful during steep declines, giving you profit potential along with protection from unexpected price rallies.

Costs and Profits

• Both strategies require you to buy options, which add to the overall cost.
• A synthetic long call’s losses are capped by the “insurance” you bought with the put option.
• In the same way, a synthetic long put’s loss is reduced by the call option you bought.
• In both cases, the strategies have unlimited potential profit. The only difference is the underlying market direction condition you need to earn money.

Risk Management

• A synthetic long call protects against plummeting stock prices due to the floor provided by the put.
• A synthetic long put limits losses from upward price movements with the call’s strike price acting as a cap.

Knowing what a synthetic long is and how these setups function allows you to tailor your approach, balancing profit potential and risk exposure for various market conditions. Choose wisely based on your confidence in price direction.