Option Investor
Educational Article

The Synthetic Long Stock

HAVING TROUBLE PRINTING?
Printer friendly version

The Synthetic Long Stock

In theory one can create the illusion of being long stock by utilizing a combination of long calls and short puts in the same stock. Now, this synthetic long stock has to be a little more precise than just have long calls and short calls on the same stock. The synthetic stock must include puts and calls of the same strike price and the number of calls and puts must be equal to each other and equivalent to the number of shares of stock you are trying to synthesize.

FIGURE 1-1: A SYNTHETIC LONG STOCK POSITION OF 500 SHARES OF XYZ

Here is an example: 500 Long XYZ Stock @ $60 compared with a LONG SYNTHETIC STOCK @ $60 using long calls and short puts as per the allocation shown above.

To test the theory as to whether the above is a Synthetic Long stock position, the synthetic long stock should move in close tandem to the LONG STOCK.


FIGURE 2-2: LONG STOCK MOVES TO $65 compared to the SYNTHETIC LONG STOCK POSITION

To prove the long stock and synthetic long stock position are basically the same; both positions should net the same gain or the same loss from the same move upward or downward.


FIGURE 3-3: LONG STOCK MOVES DOWN TO $55 FROM $60 compared to the SYNTHETIC LONG STOCK POSITION


 

Options 101 Archives