Synthetic Long Put

Synthetic Long Put

Synthetic Long Put is a strategy to be used when the option trades is concerned Bearish to very bearish sentiment in market

This strategy involves buying a at-the-money Call Option, while Selling shares in the same underlying or Index, it is a strategy with a limited loss and unlimited profit.

An investor often employs a synthetic long put strategy to profit from the severe fall in the underlying’s price, however, as with any short sale, there is always a risk of being forced to return the stock.

Nifty Synthetic Long Put

Sell 1 lot Nifty Futures or Stock

Buy 1 ATM Index Call

Investor View: Bearish to very bearish on direction of the Stock / Index.

Risk: Limited

Reward: Unlimited.

Breakeven:  Underlying Short Sale Price – Premium Paid

Illustration

Index	Nifty
Nifty Lot Size	50
Nifty Sold Price	5580
Nifty Call Strike Price	5600
Call Premium	Rs 70    (Call Premium Paid)
Breakeven point	Selling Price of Nifty - Premium Paid

Reward Potential

Ø  Profit = Unlimited

Ø  Profit Achieved When Settlement Price of Nifty < Selling Price of Nifty i.e. 5580 - Call Option Premium i.e.70

Ø  Maximum Profit = Selling price of Nifty - Settlement Price of Nifty – Premium Paid

Risk Potential

                                               

Ø  Max Loss = Call Option Premium Paid + Brokerage(s) + Statutory Charges

Ø  Loss occurs= When Settlement Price of Nifty = Strike Price of Call Option i.e 5600

Nifty Closing Price @	Profit/Loss
5400	5500 (Profit)
5500	500 (Profit)
5600	4500 (loss)
5700	4500 (Loss)
5800	4500 (Loss)

Example:

Let us assume Nifty is trading at 5500 in Apr 2013. An investor by buy Apr 5600 Call Option for Rs 70/- and a Nifty Apr Futures Sold for Rs 5580. The net premium paid to enter the trade is Rs 3500 ((Call Option Premium) X 50 Lot size) and difference or Rs 20/- for nifty futures sold @ 5580 which is Rs 4500 maximum possible loss.

If Nifty is trading at 5500 on expiration in April, the Apr 5600 Call will expires out of the money and, Subtracting the premium paid of Rs 70, Nifty Short Futures will yield a profit of Rs 80 but at the same time Call Option premium would be in a loss of Rs 70 resulting in overall profit of Rs 10

On expiration in April, if Nifty is trading at 5700, Call option will remain in the money and earn Rs 100 and futures position would have a loss of Rs 6000/- (5700 – 5580 X 50 Lot size) reducing the premium paid of Rs 3500 (70 X 50 per lot).

 Investor will make a loss of

Nifty Short Futures : Rs 6000 Loss (Nifty Sold Price – Nifty Settlement Value ) X 50 Lot Size

Nifty 5500 Call       : Rs 1500 Profit (Exercised Value Rs 100 – Premium Paid Rs 70) X 50 Lot Size