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Synthetic Long Put

  • Posted by Trading Campus
  • Date December 27, 2017
  • Comments 89 comments
synthetic-long-put

synthetic long put options trading strategy

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/-

Infosys price

At expiry

Payoff from futures

(short price-current price)

call Option Payoff

(spot-strike-premium paid)

Net Payoff
900 940-900=40 0-16 24
910 940-910=30 0-16 14
920 940-920=20 0-16 4
930 940-930=10 0-16 -6
940 940-940=0 0-16 -16
950 940-950=-10 10-16=-6 -10-6=-16
960 940-960=-20 20-16=4 -20+4=-16
970 940-970=-30 30-16=14 -30+14=-16
980 940-980=-40 40-16=24 -40+24=-16
990 940-990=-50 50-16=34 -50+24=-16
1000 940-1000=-60 60-16=44 -60+24=-16

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.

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December 27, 2017

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Bajaj Electricals Limited is engaged in engineering and projects; power distribution, illumination and consumer durables businesses.

It has a range of domestic and kitchen appliances comprising water heaters, room heaters, coolers, irons, mixers, induction cookers, toasters, kettles, microwave, rice cookers, gas stoves, non-electrical kitchen aids and pressure cookers.

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