SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Sell Put And Buy Call Strategy | A Synthetic Long Stock


The Sell Put And Buy Call Strategy is an example of a synthetic stock options strategy: using call and puts options to mimic the performance of a position, usually involving the purchase of a stock. We saw this when looking at the synthetic covered call strategy elsewhere.

In this case, what is being mimicked is a long position on a stock by selling a put and buying a call at the same strike price and expiry (usually at the money). Here’s how it works in more detail:
 


Long Stock

A Long Stock, purchased at $50 has the following payoff diagram:

 

The Sell Put And Buy Call Strategy | A Long Stock

 

 

As you would expect if the stock rises above $50 the ‘position’ is profitable and gets more profitable as the stock rises further. And the converse is true too: below $50 the stock is unprofitable and gets worse as the stock price falls.

 


How To Place A Synthetic Long Stock

In order to place a synthetic stock, it’s important to remember one of the key principles of options trading: if the pay-off diagrams of two positions are the same then they are, in effect, the same trade.

 

Therefore all we need to do is construct an options spread that has the same pay-off (or ‘P&L’) diagram as the above and we have ‘synthetically’ created a long call.

 

And the spread that does the job is to buy an at the money call and sell an at the money put. Both should have the same expiry date.

 

The long call has the following P&L diagram:

long call part of the Sell Put And Buy Call Strategy

 

And here’s the short put’s pay-off:

sell put part of the Sell Put And Buy Call Strategy

 

And when put together they produce:

The Sell Put And Buy Call Strategy produces the Synthetic Long Stock

Which is, of course, the same pay-off diagram as the Long Stock above, and therefore the same trade.

 


Advantages Of The ‘Sell Put And Buy Call’ Strategy

Why would you go to the bother of putting on the synthetic version of a bought stock when you could quite easily just buy the stock? Here are a couple of reasons:

 

Lower Capital Outlay

To own stock you require the capital to purchase the shares. Even if you’re buying stock on margin you still need to deposit 50% of the purchase price with your broker.

 

The margin requirements for the ‘sell put and buy call’ strategy is much smaller and therefore less cash is required.

 

Flexibility

Because options are involved a sophisticated trader has more, well, options to manage the trade.

 

For example if the stock price drops, therefore increasing the price of the short put, it could be rolled down (ie sold at a lower price point) or out (buying back the put and selling a put of a later expiry date).

 


Downsides To The ‘Sell Put And Buy Call’ Strategy

With all options trades there is a downside to consider to placing the synthetic version of the long call. Here are a few:

 

Dynamic Margin

The required margin is lower than a purchased stock as we’ve seen. However, because the trade includes an uncovered sold put, your broker will recalculate your margin requirements daily. If the stock has moved down significantly you’ll be asked to post more margin immediately.

 

Increased Leverage

For a smaller amount of capital you’re being exposed to the full risk profile of the stock. Therefore, when compared to the capital outlay you have more risk.

 

This is the flip side of being able to put the trade on for less capital: you’ve effectively leveraged yourself to the stock price. You could get more return (on your capital requirement) but for a greater risk.

 


Conclusion

The ‘Sell Put And Buy Call’ strategy, the sell of an ATM put coupled with the purchase on an ATM call, is a way of creating a synthetic long stock position. It requires a lower capital outlay than simply purchasing the stock, but also exposes you to the same risk.

About the Author: Chris Young has a mathematics degree and 18 years finance experience. Chris is British by background but has worked in the US and lately in Australia. His interest in options was first aroused by the ‘Trading Options’ section of the Financial Times (of London). He decided to bring this knowledge to a wider audience and founded Epsilon Options in 2012.

Related articles:

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 443 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 890 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 794 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 476 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 1,483 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 5,896 views
  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 9,492 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 11,143 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 11,524 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 9,668 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs