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Visually Analyze Option Strategies
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Synthetic Call




This is an investment strategy that mimics the payoff of a call option. A synthetic call is created by purchasing the underlying asset, selling a bond and purchasing a put option. The strike price on the put option is equal to the face value of the bond, which serves as the exercise price of the synthetic call.


A synthetic call produces the same overall payoff as a call option. The synthetic call will finish in the money when the price of the underlying asset is greater than the face value of the sold bond at the time of expiration. It will be out-of-the-money when the value of the bond is greater than that of the underlying asset. When the synthetic call is in the money, the profit is the difference between the price of the underlying asset and the face value of the bond. If the call finishes out of the money, the put option absorbs the loss from the underlying asset, with the exercise price of the put paying for the bond.


Market Opinion






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When To Use


Use this strategy when you want to buy a stock and protect its downside.




XXXX is trading at $35.50 on June 1, 2011.

Buy 1,000 shares of stock at $35.50.

Buy 10 August 2011 35 strike puts at $2.55.




This strategy is low risk, while offering unlimited upside potential. It protects your stock from a price decline.


Risk vs. Reward


Minimal risk because of a capped downside, with the reward of an unlimited upside potential.


Net Upside


Unlimited upside potential.


Net Downside


Stock price plus premium minus put strike price.


Break Even Point


Put strike plus put premium plus stock price minus put strike.


Effect Of Volatility




Effect Of Time Decay


The final month has time decay for the put you bought. You benefit from buying one month longer on the put to mitigate this effect.


Alternatives Before Expiration


To stem a loss, close the position. If the stock drops under the stop loss, sell the stock and keep the put or close out the entire position.


Alternatives After Expiration


Close position by selling the stock or put, or both.




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