This strategy is a mix of futures and a call option. I.e. a call option buyer already has a short position in the futures. If the price of the futures rises, call option acts as insurance.
This strategy looks like buying a Put Option since profit is unlimited and loss is limited to put option premium. Therefore this strategy is called a Synthetic Put. In simple buying of a Put Option, there is no underlying position in the stock but is entered into only to take advantage of price movement in the underlying stock.
Let’s consider an example to understand synthetic long put clearly.
Mr Shashank is short on 1 lot of Infosys future. He also bought 1 lot of call options of strike 940 on 23 October 2017 at a premium of 16Rs/-
|Payoff from futures
(short price-current price)
|call Option Payoff
As seen from the above table, when the stock falls below 940, the profit is unlimited. Lower the stock price, higher the profit. If the stock rises, the loss is limited to the premium paid for the call option.
Since the payoff diagram resembles the payoff diagram of a put option, it is called synthetic long put.