• user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:45210142f07671835bfc06e12e84747c' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h1>Synthetic Calls</h1>', created = 1526901470, expire = 1526987870, headers = '', serialized = 0 WHERE cid = '1:45210142f07671835bfc06e12e84747c' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:8d0844f8ad8d0b74660dc5fc13180cdc' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>What are Synthetic Calls?</h2><p>When a trader goes long a stock and long the puts as well, the configuration is known as a <strong>synthetic call</strong>.&nbsp; The purpose of this strategy is to protect against a rapid decline in the stock price; for example, it is especially useful in a very volatile market such as the one we saw in 2000 to 2002.&nbsp; When choosing the strike price of the <a href=\"/options/put-option.html\">put option</a>, it all depends on your risk parameters.&nbsp; Remember, you are using this strategy to protect you against unforeseen circumstances; therefore, it is generally a common practice to go one or two strike prices OTM, or <a href=\"/options/options-moneyness.html\">out of the money</a>.&nbsp; This would mean if you bought a $50 dollar stock, you would buy $45 or $47.50 puts.</p><h2>Synthetic Calls Risk Characteristics</h2><p>In taking a look at the risk characteristics of the synthetic call you will notice that the shape is the same as the long <a href=\"/options/call-options.html\">call option </a>by itself.&nbsp; This is why this strategy is called the \"synthetic\" call.</p><p><span class=\"inline inline-none\"><img src=\"http://www.mysmp.com/sites/default/files/images/synthetic-call-risk-characteristics[1].png\" alt=\"\" title=\"\" class=\"image image-_original \" width=\"391\" height=\"373\" /></span></p><p>So what is the difference between buying the synthetic call combination and just buying a long call option straight out?&nbsp; The key difference here is that the synthetic call will require a much larger cash outlay; you will need to purchase the stock and the put while the long call option is just the option price.&nbsp; However, the synthetic call is a less riskier proposition&nbsp; in percentage terms.&nbsp; Let\'s turn to an example:</p><p>&nbsp;</p><table style=\"width: 257px; height: 140px;\" border=\"0\"><tbody><tr><td><p>&nbsp;Purchase Price of Stock&nbsp;&nbsp;</p></td><td><p>$50.00&nbsp;</p></td></tr><tr><td><p>&nbsp;$47.50 Strike Put&nbsp;&nbsp;</p></td><td><p>&nbsp;$2.25</p></td></tr><tr><td><p>&nbsp;$50.00 Strike Call&nbsp;&nbsp;</p></td><td><p>&nbsp;$3.50</p></td></tr></tbody></table><p>&nbsp;</p><p>Using this example:</p><p>The synthetic call would cost $52.25 per share of this stock which means that if the stock dropped below $47.50 at <a href=\"/options/options-expiration-week.html\">expiration</a> and the put was exercised, the owner of the synthetic call would have a maximum risk of ($50 + $2.25 -$47.50) or $5 per share.&nbsp; This is roughly 10% of the total position.&nbsp; On the flip side, in this same situation where the stock price dropped, the long call would expire worthless and the owner would lose 100% of their investment.</p><p>On the flip side, if the stock moved higher, the synthetic put option would have a lower breakeven price than the long call option:</p><p><strong>Synthetic call breakeven</strong> = $50.00 +$2.25 = $52.25<br><strong>Long call option breakeven</strong> = $50.00 + $3.50 = $53.50</p><h2>Comparing Synthetic Calls against one another</h2><p>Generally speaking, when you compare synthetic calls against each other in order to determine the most appropriate one, remember a few key points.&nbsp; The lower the <a href=\"/options/strike-price.html\">strike price</a>&nbsp;on the put option, the lower the option premium you will pay but the more risk you will take as well.&nbsp; Additionally, the further you go out of the money, the greater percentage risk of your overall investment you are taking.</p><p>This is where <a href=\"/technical-analysis\">technical analysis </a>really comes into play.&nbsp; When you can understand the <a href=\"/technical-analysis/support-and-resistance.html\">support and resistance </a>levels in a <a href=\"/technical-analysis/free-stock-charts.html\">stock chart</a>, you can start to make more informed decisions about which option to buy.&nbsp; Remember, investing in the <a href=\"/\">stock market</a> is nothing more than an odds game and learning how to read a chart makes you that much more powerful.</p><p>While buying deep out of the money put options is riskier than when buying higher strike premiums, the reward is also greater.&nbsp; Lower price options mean lower breakevens and larger profits if the stock runs in your favor.&nbsp;&nbsp;</p><h2>Conclusion</h2><p>The synthetic allows you to lower your downside risk when you are long a stock.&nbsp; When compared to buying the call outright, it is a matter of preference.&nbsp; While the synthetic call only loses a small portion of its total investment in a worst case scenario, it requires considerably more cash than the long call option strategy.&nbsp;\\</p><div class=\"image-clear\"></div>', created = 1526901470, expire = 1526987870, headers = '', serialized = 0 WHERE cid = '1:8d0844f8ad8d0b74660dc5fc13180cdc' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:2fda152348bc4ae73408bf0b82608e9a' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide to navigating through the markets.</p><p>Tim is in the Timers Digest Top 10 Rankings for his newsletter and is the Author of \"The Secret Science of Price and Volume”. Ord also contributes to the Stocks &amp; Commodities Magazine.</p>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:2fda152348bc4ae73408bf0b82608e9a' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:4dd69529abed14a5c1c8f3ba7e22f8eb' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for every symbol on the Nasdaq, NYSE, and AMEX.</p><p>Use the fast forward and pause features to analyze your trading decisions with more precision.</p>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:4dd69529abed14a5c1c8f3ba7e22f8eb' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:151e49b034b3ac8a98c1331980da8b69' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>Related Videos</h2>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:151e49b034b3ac8a98c1331980da8b69' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:e6ff5fe7efa34d641d697991ec512c61' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>Related Articles</h2>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:e6ff5fe7efa34d641d697991ec512c61' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '4:64dc950e564b7bb494892459d2858add' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<div class=\"left\">\n <p>copyright &copy; 2011 MYSMP.com. All rights reserved.</p>\n <a href=\"/\">Home</a> • <a href=\"/advertise\">Advertise</a> • <a href=\"/sitemap\">Sitemap</a> • <a href=\"/privacy-policy\">Privacy Policy</a>\n</div>\n\n<div class=\"right\">\n <p>Designed &amp; Developed by: bxCreative.com: <a target=\"_blank\" href=\"http://bxcreative.com\">Web design</a></p>\n</div>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '4:64dc950e564b7bb494892459d2858add' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:ef414e50ef3bcd60831c79a8ccac7f37' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2 class=\"pane-title\"><a href=\"/investment-articles\">Investment Articles</a></h2><h2 class=\"pane-title\"><a href=\"/premium-services\">Premium Services</a></h2> <h2 class=\"pane-title\"><a href=\"/free-offers\">Free Offers</a></h2> <h2 class=\"pane-title\"><a href=\"/video\">Videos</a></h2>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:ef414e50ef3bcd60831c79a8ccac7f37' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:7ab206dca588aa9858fab14b55f27503' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<p>16192 Coastal Highway<br />\nLewes, Delaware 19958</p>\n', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:7ab206dca588aa9858fab14b55f27503' in /var/www/html/mysmp/includes/cache.inc on line 109.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: SELECT data, created, headers, expire, serialized FROM cache_filter WHERE cid = '1:fb9bc3d8197c3f70b5a896cc8bae29d6' in /var/www/html/mysmp/includes/cache.inc on line 26.
  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<a href=\"/\"><img src=\"/sites/all/themes/bx/images/logo.png\" /></a>', created = 1526901471, expire = 1526987871, headers = '', serialized = 0 WHERE cid = '1:fb9bc3d8197c3f70b5a896cc8bae29d6' in /var/www/html/mysmp/includes/cache.inc on line 109.

    Synthetic Calls

    What are Synthetic Calls?

    When a trader goes long a stock and long the puts as well, the configuration is known as a synthetic call.  The purpose of this strategy is to protect against a rapid decline in the stock price; for example, it is especially useful in a very volatile market such as the one we saw in 2000 to 2002.  When choosing the strike price of the put option, it all depends on your risk parameters.  Remember, you are using this strategy to protect you against unforeseen circumstances; therefore, it is generally a common practice to go one or two strike prices OTM, or out of the money.  This would mean if you bought a $50 dollar stock, you would buy $45 or $47.50 puts.

    Synthetic Calls Risk Characteristics

    In taking a look at the risk characteristics of the synthetic call you will notice that the shape is the same as the long call option by itself.  This is why this strategy is called the "synthetic" call.

    So what is the difference between buying the synthetic call combination and just buying a long call option straight out?  The key difference here is that the synthetic call will require a much larger cash outlay; you will need to purchase the stock and the put while the long call option is just the option price.  However, the synthetic call is a less riskier proposition  in percentage terms.  Let's turn to an example:

     

     Purchase Price of Stock  

    $50.00 

     $47.50 Strike Put  

     $2.25

     $50.00 Strike Call  

     $3.50

     

    Using this example:

    The synthetic call would cost $52.25 per share of this stock which means that if the stock dropped below $47.50 at expiration and the put was exercised, the owner of the synthetic call would have a maximum risk of ($50 + $2.25 -$47.50) or $5 per share.  This is roughly 10% of the total position.  On the flip side, in this same situation where the stock price dropped, the long call would expire worthless and the owner would lose 100% of their investment.

    On the flip side, if the stock moved higher, the synthetic put option would have a lower breakeven price than the long call option:

    Synthetic call breakeven = $50.00 +$2.25 = $52.25
    Long call option breakeven = $50.00 + $3.50 = $53.50

    Comparing Synthetic Calls against one another

    Generally speaking, when you compare synthetic calls against each other in order to determine the most appropriate one, remember a few key points.  The lower the strike price on the put option, the lower the option premium you will pay but the more risk you will take as well.  Additionally, the further you go out of the money, the greater percentage risk of your overall investment you are taking.

    This is where technical analysis really comes into play.  When you can understand the support and resistance levels in a stock chart, you can start to make more informed decisions about which option to buy.  Remember, investing in the stock market is nothing more than an odds game and learning how to read a chart makes you that much more powerful.

    While buying deep out of the money put options is riskier than when buying higher strike premiums, the reward is also greater.  Lower price options mean lower breakevens and larger profits if the stock runs in your favor.  

    Conclusion

    The synthetic allows you to lower your downside risk when you are long a stock.  When compared to buying the call outright, it is a matter of preference.  While the synthetic call only loses a small portion of its total investment in a worst case scenario, it requires considerably more cash than the long call option strategy. \

    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

    Tradingsim.com
    Day Trading Simulator

    Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

    Send this article to a friend.

    Enter multiple addresses on separate lines or separate them with commas.