Synthetic long stock

Summary

Synthetic long stock buys a call and sells a put at the same strike, so the two bent lines add into the straight line of 100 shares, for when you want the moves of the shares without paying $10,000. In the XYZ example it costs $4, which put-call parity explains as the interest on $100 for 30 days. A rise has no limit, you break even at $100.04, and a fall to zero would lose $10,004, the same fall as the shares.

Key terms

synthetic long stock

A bought call and a sold put at the same strike and expiry, which together move like 100 shares.

put-call parity

The rule that a call minus a put at one strike equals the stock minus the strike's value today, less expected dividends.

same strike

When the call and the put you sell share one strike price, here $100.

net debit

When a pair of trades sends cash out overall.

break-even

The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.

T plus zero line

The blue line on the chart showing your result today, if you closed the trade right now.

time value

The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.

margin

Money your broker holds against what a sold position could lose.

assignment

When a buyer exercises and you, as the seller of that option, must deliver.