The investor can use a different variation of the ‘Synthetic Long Stock’ strategy to set up an aggressive position.
Rather than using the same strike price for the puts and calls, he can use a higher strike price for the call option and a lower strike price for the put option, both of the same underlying stock and same expiry.
By splitting the strike prices between the calls and puts, the investor can set up a more aggressive position than the traditional Synthetic Long Stock.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 OTM Call
Leg 2 – Sell 1 OTM Put
Credit Spread/Debit Spread
This depends on the price of the call and put options.
If the premium of the call option is higher than the put option, then such a strategy would be a debit spread.
If the premium of the call option is lower than the put option, then such a strategy would be a credit spread.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor stands to make profit if the underlying security’s price is greater than the strike price of call option plus the net premium, if any.
The investor faces unlimited risk in this strategy.
When is this strategy unprofitable?
Heavy losses can occur for the investor in the event that the underlying security’s prices fall sharply.