Long Synthetic
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 the effect of a put option. Investors holding a short stock position purchase an at-the-money call option on the same stock to protect against a rise in the stock price. Synthetic put options are also known as married calls or protective calls.
Origin: The concept of synthetic put options originated as options markets developed, with investors seeking ways to hedge risks and protect their portfolios. As options trading became more widespread, investors discovered that combining different options and stock positions could achieve effects similar to single options, allowing for more flexible risk management.
Categories and Characteristics: Synthetic put options can be categorized into several types:
- Standard Synthetic Put Option: Achieved by holding a short stock position and purchasing an at-the-money call option.
- Protective Call: Investors hold the stock and purchase a call option to protect against a decline in the stock price.
- Married Call: Similar to a protective call but typically used for long-term portfolio protection.
Specific Cases:
- Case 1: Suppose Investor A holds 100 shares of XYZ Company, currently priced at $50. To protect against a price drop, A buys an at-the-money call option with a strike price of $50. If the stock price falls, A can sell the stock through the call option, limiting the loss.
- Case 2: Investor B is bearish on ABC Company, currently priced at $30. B shorts 100 shares of ABC and simultaneously buys an at-the-money call option with a strike price of $30. If the stock price rises, B can buy the stock through the call option, limiting the loss.
Common Questions:
- Question 1: How is the cost of a synthetic put option calculated?
Answer: The cost of a synthetic put option includes the purchase cost of the call option and the cost of holding the short position (e.g., borrowing fees). - Question 2: What is the difference between a synthetic put option and directly buying a put option?
Answer: A synthetic put option mimics a put option by combining a short stock position and a call option, while directly buying a put option involves a single options trade. Synthetic put options may offer more flexibility but also involve more complex cost and risk management.
