A Synthetic Long Call strategy is a very common strategy. It is a position where a long stock position is combined with a long put option. The purchase of a put option while still owning stocks is a strategy with a limited loss and (after subtracting the put premium) unlimited profit.
A synthetic long call is created when long stock position is combined with a long put of the same series. It is so named because the established position has the same profit potential as a long call.
Unlike the synthetic long put position, the synthetic long call strategy is a bullish strategy with limited risk. The investor expects the price of stocks to go up hoping to make profit on the increase, but he or she still wants to curtail the risk in case his expectation won’t realize and the stocks go down instead.
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying > Purchase Price of Underlying + Premium Paid
- Profit = Price of Underlying – Purchase Price of Underlying – Premium Paid
Limited Risk
The formula for calculating maximum loss is given below:
- Max Loss = Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Long Put
