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Synthetic Long Call Option Strategy

A trader is bullish in nature for short term, but also fearful about the downside risk associated with it. Here, a trader wants to hold an underlying asset either in physical form like in case of commodities or demat (electronic) form in case of stocks. But he is always exposed to downside risk and in order to mitigate his losses, he will buy 1 ATM or OTM Put Option since ITM Put option will carry more premium than ATM & OTM Put options which are relatively cheap.

Case 1: If the prices rise as per his calculations, he will make unlimited profits on his long position in spot/cash market.
Case 2: If the prices fall, then his loss is covered by the Put Option. The loss incurred will be the premium amount paid to buy Put option.

The net position created from Synthetic Call strategy is similar to Call Option buy strategy.
A major difference exists between buying a Call Option and Synthetic Call strategy. In a plain Vanilla Call Option you do not hold the underlying asset, whereas in Synthetic Call you will hold the underlying asset and reap the benefits of dividends, bonus issues, etc. (only in case if the underlying asset is a stock)

RIL is trading at Rs.720 levels, Mr. X is bullish in the long term, but wants to hedge himself from the fall in cash strategy goes wrong. He will buy 250 shares of RIL from the cash market @ Rs.720 and buy 1 700 Put Option @ Rs.10 as premium. The lot size of RIL is 250.
His net investment will be Rs.180000. [(250*720) + Rs.2500(250*10) = Rs.182500]

Reward: The gains will be unlimited since it’s a long position. His maximum loss will be Rs.2500 assuming
he will hold his cash position irrespective of the price. Break-Even Point for the net position will be Rs.730.(720+10)

Case 1: If RIL dips to Rs.690, then his net loss payoff will be Rs.7500. [{(690-720) + (10-10)}*250]
Case 2: If RIL closes at Rs.720, then his net loss payoff will be Rs.2500. [{(720-720)-(10)}*250]
Case 3: If RIL rises up to Rs.750, then his net profit payoff will be Rs.5000. [{(750-720)-(10)}*250]

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