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Option Strategy : Synthetic Long Call
Derivatives - Options

So friends, the laid back days are over and so are the easy strategies. Now is the time to do some real brain-storming. From now on, we will learn the advanced options strategies. We will begin with the easier ones and move on to the tough ones over the time. So without further ado, let’s start with our today’s strategy.

Synthetic Long call (Buy Stock, Buy Put)

This is a strategy for a trader who likes to trade relatively safe. In this strategy, we buy a stock as we are bullish in it. But you also want to minimise your loss in case of sharp fall in the prices. So you also but a Put on the stock. Buying a put will give you the right to sell the stock at a certain strike price. This strike price will be the price at which you beans Put you should buy can either be ATM or OTM)

So you can play both sides in this strategy. If the price of the stock rises, you will earn profits. If the price falls, you will always have the right to exercise your Put.

When can we use this strategy??

When you are bullish in the stock but want to protect yourself from the steep falls too.

Risk involved while using this strategy

Risk is very limited. Its only limited to Stock Price + Premium of the Put – Strike Price of the Put

Benefits of using the strategy

Unlimited profits can be earned using this strategy

When do we achieve the breakeven?

The break-even point for us will be: Put Strike Price + Put Premium + Stock Price – Put Strike Price

Example:

Let’s assume current stock price of XYZ Company is Rs. 4000

We buy 100 shares of XYZ Company at current price.

To protect our self from possible downside, we buy 100 Puts of XYZ at a strike price of Rs. 3900 and at a premium of Rs. 150

Now let’s understand how we this strategy will shape up :

 

Maximum Loss :  Stock Price + Put Premium – Put Strike Price

Rs. 4000 + 150 – 3900 = 250

Maximum Profit : Unlimited gain if the stock keeps rising

Breakeven : Stock Price + Put Strike Price + Put Premium – Put Strike Price

4000 + 3900 + 150 – 3900 = 4150

The Analysis of the Strategy : The Long Call strategy limits the risk of the loss to the premium paid by us for a particular call option (Rs. 30 in our case).




The Analysis of the Strategy :

This is an excellent strategy when you want to buy a particular stock but also want to limit the potential downside risk. The pay-off resembles a long call strategy and is therefore called as Synthetic Long Call.

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Pratyush DixitConsultant - Digital Marketing and Content

Pratyush is a Post Graduate in Marketing Management and has a leadership experience of nearly a decade in diversified industry including Stock Broking. Having headed companies for over half a decade, Pratyush brings with him, rich Marketing and....

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