What is Long Synthetic ?
320 reads · Last updated: December 5, 2024
A synthetic put is an options strategy that combines a short stock position with a long call option on that same stock to mimic a long put option. It's also called a synthetic long put. Essentially, an investor who has a short position in a stock purchases an at-the-money call option on that same stock. This action is taken to protect against appreciation in the stock's price. A synthetic put is also known as a married call or protective call.
Definition
A synthetic put option is an options strategy that combines a short position with a call option on the same stock to mimic a put option. The goal is to protect the investor from the risk of rising stock prices. Synthetic put options are also known as married call options or protective call options.
Origin
The concept of synthetic put options originated with the development of the options market, particularly as investors sought hedging strategies to manage risk. As the options market matured, investors realized that combining different financial instruments could achieve effects similar to directly purchasing options.
Categories and Features
Synthetic put options are mainly divided into two types: married call options and protective call options. Married call options are typically used when acquiring new stocks, while protective call options are used to protect existing holdings. The main feature is limiting potential losses by holding a short stock position and purchasing call options.
Case Studies
Case 1: Suppose Investor A holds a short position of 100 shares in XYZ Company and buys a call option for XYZ at $50 per share. When XYZ's stock price rises to $60, Investor A can exercise the call option to buy the stock at $50, avoiding the higher market price. Case 2: Investor B purchases a call option on ABC Company while holding its stock to prevent losses from rising stock prices. This strategy helps Investor B maintain a stable portfolio amid market fluctuations.
Common Issues
Common issues investors face when using synthetic put options include selecting the appropriate call option strike price and expiration date, and evaluating the cost-effectiveness of the strategy. A common misconception is that synthetic put options can completely eliminate risk, whereas they actually only cap the potential losses.
