A synthetic call is a financial derivative that combines a put option and a call option to replicate the payout of a traditional call option.
Description
The put option has a strike price that is below the current market price of the underlying asset, while the call option has a strike price that is above the current market price. When the underlying asset increases in value, the put option decreases in value, while the call option increases in value. If the underlying asset decreases in value, the put option increases in value, while the call option decreases in value.
The synthetic call can be used to hedge against the risk of a decline in the price of the underlying asset, or to speculate on the possibility of the underlying asset increasing in value. It can also be used to create more complex option strategies, such as a collar, which involves buying a put option and selling a call option to create a protective floor and ceiling for the underlying asset.
Breakeven
The strike price of put option plus the premium paid for put option (minus premium received for call option)
Sweetspot
Stock price goes Up.
Max profit
the difference between the strike price of the call option and the breakeven point, minus the premium paid for the put option
Max loss
limited to the premium paid for the put option. This loss occurs if the price of the underlying asset is above the strike price of the call option at expiration
