Long Synthetic

1. Core Description

• A Long Synthetic (also called a synthetic put) combines short stock + long call on the same underlying to approximate the economic exposure of buying a put.
• It is a bearish, defined-risk structure. It tends to gain when the stock falls, while the long call caps losses if the stock rises.
• Compared with a listed put, a Long Synthetic can behave similarly at expiration, but may differ in real-world cost due to borrow fees, dividends, margin, and early-exercise dynamics.

2. Definition and Background

What a Long Synthetic (Synthetic Put) Is

A Long Synthetic is an options-based position designed to replicate a long put. The standard construction is:

• Short 100 shares of a stock
• Buy 1 call option on the same stock (same expiration, strike often near at-the-money)

Because the call acts like “insurance” on the short stock, this setup is also commonly called a protective call or married call. The key idea is simple. Short stock creates bearish exposure, and the long call prevents losses from becoming unlimited if the stock rallies.

Why It Exists (Historical and Market Context)

Synthetic replication became widely discussed after standardized equity options expanded and traders increasingly used the logic of put-call parity to relate prices of stock, calls, and puts. In practice, synthetics are used when investors want put-like exposure but prefer the liquidity of calls, face constraints in the put market, or are optimizing financing and execution.

A Long Synthetic is also a useful “building block” for market makers and professional desks. They may choose synthetics to manage inventory, hedge directional risk, or compare relative pricing across options (for example, when volatility skews make calls and puts feel “asymmetric” in cost).

3. Calculation Methods and Applications

Payoff Intuition (No Heavy Math Needed)

Think of the position as two parts:

• Short stock: profits if the stock falls, loses if it rises
• Long call: costs a premium, gains if the stock rises above the strike

At expiration, the call offsets additional losses on the short once the stock is above the strike. This is why a Long Synthetic is often described as “a put-like payoff with a cap on upside risk.”

A Minimal Parity Link (For Pricing Intuition)

A commonly taught relationship in options textbooks is put-call parity (for European-style options, American options add early-exercise considerations). One standard form is:

\[C - P = S - K e^{-rT}\]

This relationship motivates why short stock + long call can resemble long put exposure after adjusting for financing effects (interest rates), plus real-world frictions like dividends and borrow costs.

Practical Applications of Long Synthetic

1) Defined-risk bearish positioning

If an investor wants bearish exposure but does not want the unlimited risk of a naked short, a Long Synthetic can define the worst-case outcome above the call strike (excluding gaps and execution frictions).

2) Put-like exposure when implementation differs

A listed put is often the simplest instrument for put-like payoff. However, a Long Synthetic may be considered when:

• call markets are more liquid for the desired expiration and strike area
• the put market is wide or unusually priced
• the investor wants to separate “option premium” from “stock financing and borrow” components

3) Relative value and hedging workflows

Professional desks often compare:

• listed put cost
• versus the “replicated put” via Long Synthetic

Even when the end payoff looks similar, the path of profit and loss can differ before expiration because borrow fees, dividends, and implied volatility can change over time.

4. Comparison, Advantages, and Common Misconceptions

Long Synthetic vs. Long Put (Conceptual Comparison)

Advantages Often Cited

Defined upside risk versus an uncovered short

A naked short can lose without bound if the stock rallies. In a Long Synthetic, the long call is intended to cap that risk above the strike.

Flexibility in strike and tenor

You can choose a strike and expiration to target a specific risk window (event risk, quarter-end exposure, or longer horizons). Adjusting the call leg changes how quickly the cap becomes effective.

Sometimes different “all-in” economics than a put

In certain market conditions, calls and puts can differ in implied volatility, and stock borrow can be cheap or expensive. This means the replicated exposure can be cheaper or costlier than a listed put depending on the environment.

Trade-offs and Risks You Should Not Ignore

Borrow and recall risk

Shorting stock requires borrowing shares. Availability can change, borrow fees can rise, and positions can be bought in under certain conditions. These risks exist even though the call caps price risk.

Dividend and corporate action exposure

Short sellers typically pay dividends to the share lender. Corporate actions (special dividends, splits, mergers) can change mechanics and option adjustments, affecting outcomes.

Margin and liquidity constraints

A Long Synthetic can be more margin-intensive than a long put. Also, if either leg has poor liquidity (wide bid and ask), execution slippage can be meaningful.

Common Misconceptions

“A Long Synthetic is exactly the same as a put at all times.”

At expiration, payoff similarity is the core idea. But before expiration, mark-to-market can differ due to:

• borrow fees and financing
• dividends paid on the short
• call time value and implied volatility changes
• early-exercise effects (especially for American-style equity options)

“The call always makes the position safe.”

The call limits losses above the strike, but real-world risk is broader than payoff charts:

• the position can still experience large interim losses before the call’s offset dominates
• gaps, liquidity, and execution timing can matter
• borrow and recall mechanics can force changes at unfavorable times

5. Practical Guide

When a Long Synthetic Is Typically Considered

A Long Synthetic is usually explored when an investor needs bearish or hedging exposure and is weighing:

• ease and cost of buying a put
• liquidity of calls versus puts
• feasibility and carrying cost of short stock
• margin impact and operational complexity

This structure is not purely for beginners. It combines options knowledge with short-selling mechanics, and the “true cost” often comes from financing and operational details rather than the option premium alone.

Step-by-Step Design Checklist

1) Define the objective

• Is the goal a directional bearish view, or a hedge for another exposure?
• What time window matters (days, weeks, months)?
• What is the maximum tolerable loss scenario if the stock rises sharply?

2) Choose strike and expiration deliberately

• Near at-the-money calls often create the closest “put-like” profile.
• In-the-money calls cost more, but can reduce the “gap” before the cap becomes effective.
• Out-of-the-money calls are cheaper, but allow larger losses before protection activates.

3) Confirm borrow and carry economics before trading

Key items to review:

• borrow availability (is the stock hard-to-borrow?)
• estimated borrow fee range and whether it can change
• upcoming dividend dates and expected dividend amount

If placing the trade via Longbridge ( 长桥证券 ), review the platform’s stock borrow availability indicators (when provided), margin requirements, and option chain liquidity (volume, open interest, spreads). The goal is to understand the implementation cost, not only the payoff diagram.

4) Execution approach: reduce legging risk

A common operational risk is entering one leg and getting a worse fill on the other leg due to fast price moves or spread widening. Practical controls include:

• using limit orders
• avoiding illiquid sessions
• planning an acceptable worst-case fill range for both legs

5) Ongoing monitoring rules

A workable monitoring routine often includes:

• borrow fee changes (carry can materially affect P&L over time)
• time decay of the call (theta)
• major corporate events and the dividend calendar
• predefined triggers for reducing size, rolling the call, or closing both legs

Case Study (Hypothetical, Not Investment Advice)

Assume a U.S.-listed stock is trading at $100. A trader wants put-like downside exposure for 1 month, but wants a hard cap on losses if the stock rallies.

Structure (1 contract = 100 shares):

• Short 100 shares at $100
• Buy 1 call with strike 100, 1 month to expiration
• Call premium paid: $4 per share (so $400 total), ignoring commissions and fees

Scenario A: Stock falls to $80 at expiration

• Short stock profit: $(100 - 80) * 100 = $2,000
• Call expires worthless: -$400 premium
• Approx. net (before borrow, dividends, fees): $1,600

Scenario B: Stock rises to $130 at expiration

• Short stock loss: $(130 - 100) * 100 = -$3,000
• Call intrinsic gain: $(130 - 100) * 100 = $3,000
• Net from price movement: ~$0
• Approx. net (before borrow, dividends, fees): -$400 (the premium)

What this illustrates

• The position behaves “put-like.” It tends to gain if the stock drops, while the call helps prevent losses from growing beyond the strike region.
• Results can differ if, during the holding period, the trader pays dividends on the short or faces high borrow fees. Those carrying costs can make the realized outcome materially different from a clean replication.

6. Resources for Learning and Improvement

Core topics to study (in order)

• Option basics: calls vs. puts, intrinsic vs. extrinsic value
• Short selling mechanics: borrow, recalls, dividends on short positions
• Put-call parity: how stock, calls, and puts relate in pricing
• Option risk measures: delta, gamma, theta, vega (focus on intuition first)
• American-style option exercise: when early exercise can matter (often around dividends)

Useful resource types

7. FAQs

What is a Long Synthetic (synthetic put) in plain English?

A Long Synthetic is a way to get put-like downside exposure by shorting the stock and buying a call. If the stock falls, the short tends to profit. If it rises, the call is designed to limit additional losses above its strike.

Why not just buy a put?

A listed put is often simpler. A Long Synthetic may be considered when an investor prefers the liquidity or pricing of calls, or wants to separate option premium from short-sale financing. The trade-off is more operational complexity (borrow, dividends, margin).

Is the upside risk truly capped?

The call is intended to cap price-based losses above the strike at expiration, but real-world outcomes can still be affected by execution, early exercise behavior, liquidity, and stock borrow constraints. The cap does not eliminate all risks.

What are the biggest hidden costs?

Common hidden costs include borrow fees, dividends owed on the short, wider bid and ask spreads on the call, and margin effects. These can be larger than expected and can change over time.

Does a Long Synthetic always track a long put day-to-day?

Not necessarily. While the expiration payoff can be similar, daily P&L can diverge because the position includes stock financing and a call with time value. Changes in implied volatility and dividend expectations can also create differences.

How do I close a Long Synthetic position?

Typically by buying back the short stock and selling the call. In some cases, exercising the call can offset the short, but exercise decisions should consider remaining extrinsic value and any dividend-related factors.

What is a common execution mistake?

Legging into the trade without a plan, for example, entering the short first and then chasing the call, or buying the call first and then shorting into a fast market. Coordinated execution and liquidity checks can reduce this risk.

How does margin differ from buying a put?

Buying a put usually requires paying the premium. A Long Synthetic involves short stock, which typically requires margin and depends on borrow availability. The capital impact can be materially larger and more variable.

8. Conclusion

A Long Synthetic (synthetic put) is a way to replicate put-like exposure using short stock + long call. It can create a similar expiration payoff profile to a long put and can cap upside price risk compared with an uncovered short. Using a Long Synthetic responsibly requires understanding that real-world results depend not only on the option premium, but also on borrow availability, dividends, margin requirements, liquidity, and early-exercise dynamics.