Synthetic Long Stock – The Option Strategy Desk Reference

Synthetic Long Stock

Strategy: Buy n ATM Calls, 365 DTE

Sell n ATM Puts, Same Expiry

(Longer-term expirations and even LEAPS options are used

to give the long calls ample time to work for more profit.)

Example:

Price Chart: Uptrending

Current IV%: 20%

IV Rank: 30

Trade: Buy one or more ATM or slightly OTM call options; sell an equal number of ATM or slightly OTM put options.

Typical Strike Deltas:

ATM Long Calls 0.55

ATM Short Calls 0.50

Goals: Buy one or more call options on an underlying security that is trending upward. Sell a put option to finance the premium paid for the long call option. Provide ample time for the long calls to move ITM for a corresponding increase in premium value. While the premium of the long call options increases, the premium of the short put options decreases in value for added profit.

Manage: When the long call and short put options return an acceptable profit, and before Theta begins to erode the premium value of the long call, close the long calls for profit. If the short puts are far OTM, they may either be closed for much less premium than originally received or permitted to expire worthless. If the long call is ITM, determine if exercising the option (receiving the intrinsic value less the remaining extrinsic value) is more profitable than simply selling the long call options for the current premium value.

Profit: Close when this trade returns a profit greater than 50 percent; long-term expirations can return profits in excess of 100 percent.

Loss: Close this trade to prevent a major loss if the price of the underlying reverses direction as a result of poor earnings or an unexpected corporate or financial sector event.