A synthetic long stock position uses options to replicate the profit and loss profile of owning 100 shares of stock. By combining a long call and a short put at the same strike price, you create a position that behaves exactly like stock ownership - without actually buying the shares.
What is Synthetic Long Stock?
Synthetic long stock is an options strategy that mimics owning shares of the underlying stock. The position consists of buying a call option and selling a put option at the same strike price and expiration date. The result is a position with identical directional exposure to owning 100 shares.
Simple version: Instead of buying 100 shares for full price, you buy a call and sell a put at the same strike. Your profit and loss will match what you would have made or lost owning the actual shares.
How to Create Synthetic Long Stock
The construction is straightforward:
- Buy 1 call option at strike price X
- Sell 1 put option at strike price X
- Both options have the same expiration date
Synthetic Long Stock Example
Stock ABC is trading at $100. You want long exposure but do not want to tie up $10,000.
- Buy 1 $100 call for $5.00 ($500)
- Sell 1 $100 put for $5.00 ($500 credit)
Net cost: $0 (or very small debit/credit depending on pricing)
If stock goes to $120: Call worth $20, put expires worthless = +$2,000 profit
If stock goes to $80: Call expires worthless, put costs $20 = -$2,000 loss
This matches exactly what owning 100 shares at $100 would produce.
Why the Position Works
The synthetic long stock works because of put-call parity, a fundamental options pricing relationship:
- Long call: Profits when stock rises above the strike
- Short put: Loses when stock falls below the strike (you are obligated to buy)
- Combined: Dollar-for-dollar movement with the stock in either direction
Benefits of Synthetic Long Stock
1. Capital Efficiency
Instead of paying full stock price, your capital requirement is just the margin on the short put (typically 20% of strike price).
- Buying 100 shares at $100: Requires $10,000 (or $5,000 on margin)
- Synthetic long: Requires approximately $2,000 margin
2. Leverage
The reduced capital requirement provides leverage. You can control more shares with less money, amplifying both gains and losses.
3. Flexibility
- Choose your effective entry price by selecting different strikes
- Select any expiration date that suits your timeframe
- Easy to roll positions to extend duration
4. Potential for Zero Cost Entry
When the call and put have the same value (at-the-money), the position can be entered for zero net premium.
Risks of Synthetic Long Stock
1. Same Downside Risk as Stock
You have full exposure to stock declines. If the stock drops 50%, your loss matches owning shares.
2. Margin Requirements
The short put creates margin obligations. If the stock drops significantly, you may face margin calls.
3. Assignment Risk
The short put can be assigned early, forcing you to buy shares at the strike price.
4. No Dividends
Unlike actual stock ownership, synthetic positions do not receive dividends (though this is partially priced into the options).
5. Expiration Management
Positions expire, requiring you to roll or close them, unlike stock which you can hold indefinitely.
Important: The leverage works both ways. While you control more shares with less capital, your losses can exceed your initial investment if you do not manage the position properly.
Choosing Strike Prices
At-the-Money (ATM) Strike
- Zero or near-zero cost entry
- Delta of approximately 100 (matches stock perfectly)
- Most common choice
In-the-Money (ITM) Call / Out-of-the-Money (OTM) Put Strike
- Creates a debit (you pay to enter)
- Effectively buying stock at a lower price
- Higher probability of profit
Out-of-the-Money (OTM) Call / In-the-Money (ITM) Put Strike
- Creates a credit (you receive money to enter)
- Effectively buying stock at a higher price
- Lower probability of profit but you get paid to wait
Strike Selection Example
Stock at $100:
ATM synthetic: Buy $100 call, sell $100 put = approximately $0
Bullish synthetic: Buy $95 call for $7, sell $95 put for $2 = $5 debit (like buying at $95)
Aggressive synthetic: Buy $105 call for $2, sell $105 put for $7 = $5 credit (like buying at $105 but getting paid $5)
Synthetic Long vs Buying Stock
| Factor | Synthetic Long | Owning Stock |
|---|---|---|
| Capital Required | Lower (margin only) | Full price or 50% margin |
| Dividends | None | Yes |
| Voting Rights | None | Yes |
| Holding Period | Until expiration | Indefinite |
| Assignment Risk | Yes (on short put) | No |
| Leverage | Higher | Lower |
When to Use Synthetic Long Stock
- Limited capital: You want stock exposure but cannot afford full share price
- Leverage desired: You want to amplify returns on a bullish view
- Temporary position: You want stock exposure for a specific period
- Arbitrage: When options mispricing creates opportunities
- Tax planning: Different treatment than stock in some situations
Managing Synthetic Long Positions
- Monitor margin: Keep enough capital to cover margin requirements
- Roll before expiration: If you want to maintain the position, roll to a later expiration
- Set stop losses: Define your maximum loss tolerance
- Watch for assignment: Be prepared for early assignment on the short put
- Consider converting to stock: If assigned or if you want to hold long-term
Track Your Synthetic Positions
Pro Trader Dashboard tracks all your options positions including synthetic stock strategies. Monitor your Greeks and P/L in real-time.
Summary
Synthetic long stock replicates owning shares using options - buy a call and sell a put at the same strike. This strategy offers capital efficiency and leverage while maintaining full directional exposure to the stock. Remember that you have the same downside risk as owning shares, and positions require active management due to expiration. Use synthetic positions when you want stock-like exposure with less capital, but always be aware of the leverage and margin requirements involved.
Learn about related strategies: synthetic short stock and risk reversals.