Synthetic Call Option Strategy
Strategy Level: Beginners
Instruments Traded: Call + Underlying
Number of Positions: 2
Market View: Bullish
Risk Profile: Limited
Reward Profile: You can also find out more about
The Synthetic Call Option Strategy is used by traders who are bullish about the asset they hold for the long term but also concerned about potential downside risks. This strategy offers unlimited potential for reward with minimal risk.
How the Synthetic Call Strategy Works
The Synthetic Call Strategy involves buying PUT options of the underlying asset that the trader holds for the long term. This allows them to make money if the underlying price rises. If the price falls, the loss is limited to the premium paid for the PUT option.
When to Use Synthetic Call Strategy?
The Synthetic Call Option Strategy is utilized by traders who hold a bullish outlook on their long-term investments but are also concerned about potential downside risks.
Synthetic Call Option Strategy Example
Imagine you are bullish on HDFC Bank, which is currently trading at Rs. 1,800. However, you are concerned about the potential loss in case HDFC Bank’s stock price moves downwards. In this scenario, a synthetic call strategy could be implemented by purchasing HDFC Bank shares at the current market price and buying a Put Option with a Rs 1,750 strike price at a premium of Rs 50 to protect against a fall in HDFC Bank’s stock price.
- HDFC Bank stock price today: Rs. 1,800
- Put Option Strike Price: Rs. 1,750
- Lot Size: 75
- Premium Paid: Rs. 50
- Break Even Point: Rs. 1,850 (Purchase Price + Premium Paid)
Payoff Schedule for Synthetic Call Options
| HDFC Bank Stock Price at Expiry (Rs) | HDFC Bank Stock: Payoff | Payoff for Put Options (BEP-CP) | Net Payoff (Rs) |
|---|---|---|---|
| 1,700 | -7,500 | 3,750 | -3,750 |
| 1,750 | -3,750 | -3,750 | -7,500 |
| 1,800 | 0 | -3,750 | -3,750 |
| 1,850 | 3,750 | -3,750 | 0 |
| 1,900 | 7,500 | -3,750 | 3,750 |
| 1,950 | 11,250 | -3,750 | 7,500 |
| 2,000 | 15,000 | -3,750 | 11,250 |
Market View – Bullish
The Synthetic Call Option Strategy is suitable for a bullish market view.
Synthetic Call: Risk Profile
The risk profile of the Synthetic Call is limited. The maximum loss occurs when the price of the underlying rises above the strike price.
Max Loss = Premium Paid
Synthetic Call: Reward Profile
The reward profile of the Synthetic Call is the potential profit, which you can also find out more about. The Put Option offers maximum profit when the price of the underlying rises above its purchase price plus the premium.
Profit = (Current price of Underlying – Purchase price of Underlying) – Premium paid
Maximizing Profits with Synthetic Call
The strategy maximizes profits when the underlying asset goes up.
Maximum Loss Scenario for Synthetic Call
The maximum loss scenario occurs when the option is exercised and the underlying asset goes down.
Benefits of Synthetic Call
The Synthetic Call protects long-term investments.
Disadvantages of Synthetic Call
If the underlying asset falls and you exercise your option, you can suffer losses.
How to Exit the Synthetic Call Strategy
You can exit the strategy by selling the underlying at a profit or waiting until the expiration of the option.
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