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Synthetic long stock

Long a call and short a put at the same strike and expiration; a position with the payoff of 100 shares, built from options.

By put-call-parity, a long call plus a short put at the same strike replicates the stock. delta is about 1.00, gamma, theta and vega roughly cancel, and the P&L line is a straight 45 degrees.

Traders use it to get stock exposure with less cash outlay, to take a position in a hard-to-borrow name, or to keep exposure while shares are tied up elsewhere. The catch is that the short put carries full downside and full early-assignment risk.

Example: XYZ at $50. Buy the $50 call for $2.30, sell the $50 put for $2.10, net debit $0.20 or $20 per contract. If XYZ goes to $56 you make roughly $600 − $20. If it goes to $44 you lose roughly $600 + $20. Exactly like 100 shares, for $20 of cash instead of $5,000 — plus a large buying-power-reduction.

Related: synthetic-short-stock, put-call-parity, conversion

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.