Synthetic Long Call
A synthetic long call is created when long stock position is combined with a long put of the same series. It is so named because the established position has the same profit potential as a long call.
|Synthetic Long Call Construction|
|Long 100 Shares|
Buy 1 ATM Put
Unlimited Profit Potential
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying > Purchase Price of Underlying + Premium Paid
- Profit = Price of Underlying - Purchase Price of Underlying - Premium Paid
|Synthetic Long Call Payoff Diagram|
The formula for calculating maximum loss is given below:
- Max Loss = Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Long Put
The underlier price at which break-even is achieved for the synthetic long call position can be calculated using the following formula.
- Breakeven Point = Purchase Price of Underlying + Premium Paid
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