Synthetic Long Stock is an option strategy which is essentially the same as a stock position, except that the position is entered into with options.
Such a strategy generally requires a smaller margin investment over simply buying the equivalent underlying security.
When to use this strategy?
This strategy can be used by an investor as a substitute for purchasing the underlying stock itself.
How to build this strategy?
This strategy has only 2 legs:
Leg 1 – Buy 1 ATM Call
Leg 2 – Sell 1 ATM 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.
Since this strategy is essentially the same as a stock position, the profit potential is unlimited.
When is this strategy profitable?
The strategy is profitable when the underlying price is greater than the strike price of the call option plus the net premium.
Similar to stock position, this strategy has unlimited risk.
When is this strategy unprofitable?
The investor faces losses when the underlying asset’s price is lesser than the strike price of the call option.