What is a Synthetic Long? Definition, Setup, and Example
A synthetic long is a two-leg options position using a long call and a short put at the same strike and expiration that replicates the payoff of owning 100 shares of stock.
What is a Synthetic Long?
A synthetic long is an options position that replicates the payoff profile of owning 100 shares of stock. The trader buys one call option and sells one put option at the same strike price and expiration date. The net delta of this position is approximately +1.00, meaning it moves dollar-for-dollar with the underlying stock. This is the options equivalent of holding the stock, but it costs less upfront and uses margin differently.
The strategy relies on put-call parity, which guarantees that a long call plus a short put equals a long stock position when both options share the same strike and expiration. The synthetic long is the mirror image of a synthetic short, which uses a long put and a short call to replicate shorting the stock.
How It's Calculated / Identified
The synthetic long is constructed with two legs:
- Buy 1 call option at strike K with expiration T
- Sell 1 put option at the same strike K with expiration T
The net premium paid or received depends on the difference between the call and put premiums:
Net Premium = Call Premium - Put Premium
If the call costs more than the put, the position pays a net debit. If the put is more expensive, the position collects a net credit. The breakeven price at expiration equals the strike price plus the net premium paid (or minus the net credit received).
The profit at expiration is:
- Profit = (Stock Price - Strike) - Net Premium Paid, if stock is above strike
- Loss = (Strike - Stock Price) + Net Premium Paid, if stock is below strike
Maximum profit is unlimited to the upside. Maximum loss is the strike price minus the net credit received, which occurs if the stock falls to zero.
Worked Example
Consider AMD trading at $150.00. A trader creates a synthetic long using the $150 strike options expiring in 45 days.
- Buy 1 AMD $150 call for $5.50
- Sell 1 AMD $150 put for $4.80
Net premium paid = $5.50 - $4.80 = $0.70 per share, or $70 per contract
If AMD rises to $170 at expiration, the call is worth $20.00. The trader's profit is $20.00 - $0.70 = $19.30 per share, or $1,930 per contract. If AMD falls to $130 at expiration, the short put loses $20.00. The trader's loss is $20.00 + $0.70 = $20.70 per share, or $2,070 per contract.
This matches owning 100 shares of AMD at $150.00. At $170, stock ownership profits $20.00 per share. The synthetic profits $19.30, with the $0.70 difference being the net premium paid.
When Traders Use It
Traders use a synthetic long when they want bullish exposure without deploying the full capital required to buy shares. Buying 100 shares of AMD at $150 costs $15,000. The synthetic long requires margin for the short put plus the call premium, which is often a fraction of that amount.
The position also appears when a trader already owns stock and wants to monetize it. Selling a put against a long call converts the position into a synthetic long, which can be used to roll exposure forward or adjust the effective entry price. Market makers use synthetic longs to delta-hedge short options positions. The strategy is also central to conversion arbitrage, where a trader buys stock, buys a put, and sells a call to lock in a risk-free return when options are mispriced.
Limitations / Common Misconceptions
The synthetic long carries assignment risk on the short put. If the stock falls below the strike and the put goes in-the-money, the trader faces early assignment and ends up long 100 shares at the strike price. That converts the position into actual stock ownership, which may require additional capital.
The position loses money if the stock declines, and the loss is nearly identical to owning the stock. The short put also creates a margin requirement that grows as the stock falls. A trader who cannot meet that margin faces a forced liquidation.
A common misconception is that the synthetic long is cheaper than buying stock. The upfront cost is lower, but the margin requirement on the short put can tie up capital equal to a portion of the stock price. The position also suffers from the bid-ask spread on both legs, which increases the effective cost of entry.