Option Strategies Details
Sell one ATM Put and buy one ATM Call
1. Speculate on increasing price and increasing volatility 2. Hedge an equity position (because a synthetic long behaves almost exactly like long stock)
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N/A
Long 100 Shares of Stock
Theoretically very high (if the stock goes to $0)
same as Max Contract Loss
Synthetic Long
Other names
You sell one ATM Put and buy one ATM Call
Description
A trader who wants to speculate on increasing price and increasing volatility can open a Synthetic Long. The trader may pay a small debit, receive a small credit, or open the trade for exactly $0.
Suppose stock XYZ is trading at $27. You forecast an increase in price and an increase in volatility.
You open a $27 Synthetic Long at exactly $0.00, no cost, to express this view. How is this possible? The $27 Put bid price is $3.25 and the $27 Call ask price is also $3.25, so when you sell the $27 Put you receive exactly $3.25 and you use that credit to pay for the $27 Call.
The breakeven price for this trade is the exact price of the underlying when you entered since this structure behaves almost exactly like owning 100 shares of XYZ: theta, vega, and gamma are all roughly zero and delta is roughly +100.
The max loss on this position at expiry is theoretically very high but capped, since XYZ price can only decrease to zero. The max gain of a Synthetic Long is theoretically unlimited, since XYZ price can increase indefinitely. Since the loss on a Synthetic Long is theoretically very high (but not technically unlimited), this structure carries a high "risk of ruin". The unlimited loss can be mitigated by buying a further OTM Put, which caps downside losses but makes the position more expensive to open (i.e. the debit becomes larger) and removes some of the similarities to owning 100 shares: theta becomes negative, vega and gamma become positive, and delta drops below +100.