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Chapter 7

All about Synthetic Call, Synthetic Put and Long Combo

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Skill Takeaways: What you will learn in this chapter
  • What is a Synthetic Call and a Synthetic Put
  • What is a Long Combo and how to construct it 

Options trading offers unmatched flexibility, making it the preferred choice for many traders. In this chapter, we’ll explore how Call and Put options can be synthetically created using other instruments, and how a combination of these can lead to a bullish strategy called the Long Combo. 

Synthetic Call 

What is a Synthetic Call?

A Synthetic Call replicates the payoff of a Call option using a Put option combined with either a stock (cash segment) or a futures contract. This strategic combination provides the upside potential of a long Call while controlling risk.

In essence, it delivers the same benefits as buying a Call option—unlimited upside with limited downside—without actually purchasing the Call. It is also referred to as a Synthetic Long Call, Protective Put, or Married Put. 

Construction

A diagram of a stock exchange

AI-generated content may be incorrect.

To create a Synthetic Call:

  • Buy an At-the-Money (ATM) Put Option
  • Buy the underlying stock or a futures contract 

This approach is popular among investors who already hold shares and want to protect against downside risks without liquidating their positions. Selling shares may lead to tax liabilities and loss of corporate benefits like dividends, rights, or voting rights. By purchasing a put option, they effectively insure their holding.

The result is a bullish strategy that cushions the investor from adverse price movements while retaining the benefits of holding the stock.

Payoff Diagram Explanation

The Synthetic Call payoff is generated by superimposing the payoff of a put option over a long stock or futures position. This results in a profile similar to a Call option, shown in purple in the diagram. 

  • Profit Potential: Unlimited 

  • Maximum Loss: Limited to the put premium plus the difference between stock price and put strike 

  • Breakeven: Stock purchase price + put premium 

Synthetic Put

What is a Synthetic Put?

Just like its counterpart, a Synthetic Put mimics the payoff of a traditional put option. It is constructed using a short futures (or short stock) position combined with a long call option. 

This combination is also known as a Synthetic Long Put, Protective Call, or Married Call.

Construction 

A diagram of different types of options

AI-generated content may be incorrect.

 

To build a Synthetic Put:

  • Short a futures contract or the stock
  • Buy an At-the-Money (ATM) Call Option

The Call serves as protection against upward movement, allowing the trader to cap losses while still profiting from a bearish outlook.

Why Use a Synthetic Put? 

A graph with a green line

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The primary reasons to use this strategy include:

  • Risk Management: Caps potential losses on a bearish position.
  • Margin Efficiency: Adding a call drastically reduces the required margin.

Example: Margin Benefit

  • A short Nifty futures trade may require a margin of ₹1,05,005.
  • By adding an ATM Call option, margin drops significantly to ₹20,097.

This reduced margin makes it a cost-effective bearish strategy. While the profit remains unlimited on the downside, the Call option limits the loss if the market rises.

  • Maximum Profit: When the stock drops to zero
  • Maximum Loss: Strike price of Call – short entry price + Call premium
  • Breakeven: Short price – Call premium 
A graph with a green line

AI-generated content may be incorrect.

Conclusion

A Synthetic Put is not a direct replacement for a short position but serves as a risk-managed approach to bearish trading. It allows traders to control downside risk while optimising capital efficiency. 

Long Combo

What is a Long Combo?

The Long Combo strategy is a bullish options setup created by combining two Out-of-the-Money (OTM) options:

  • Sell an OTM Put Option
  • Buy an OTM Call Option

This combination gives a directional long exposure at a lower cost compared to directly purchasing a future or stock.

Construction

  • The strategy simulates the payoff of holding the underlying.
  • It’s useful when the trader is bullish but wants to limit the capital outlay. 

Payoff Profile

The Long Combo provides:

  • Unlimited Profit: If the underlying rises significantly
  • Limited Risk: Small initial loss if the underlying stays within range
  • Breakeven: Higher Call strike + net debit paid for initiating the trade

Unlike futures, this strategy offers more room for the underlying to fluctuate without causing substantial losses. It is especially effective in moderately bullish scenarios where a trader wants flexibility and cost efficiency. 

Conclusion

The Long Combo is a strategic and cost-effective way to express a bullish view. By combining an OTM Put sell and an OTM Call buy, traders can design a trade with capped downside, unlimited upside, and better capital utilisation. 

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