A synthetic long put is created when short stock position is combined with a long call of the same series. The synthetic long put is so named because the established position has the same profit potential as long put. Futures and options traders can create a trading vehicle, through a combination of futures and options, that replicates another trading instrument. You may wonder why anyone would go through the hassle of mimicking an instrument, instead of simply trading the original. The answer is simple: As the creator of the vehicle, you can customize it to better meet your needs, as well as design it to take better advantage of the underlying market.
Unlimited Profit Potential
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying < Sale Price of Underlying – Premium Paid
- Profit = Sale Price of Underlying – 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 Call
