Synthetic Long

It's called synthetic because you've synthesized (created artificially) the payoff profile of stock ownership using options. You don't actually own shares, but your profit and loss is identical to someone who does. It's 'synthetic' in the same way synthetic materials replicate natural ones.

The PAYOFF is the same - you make/lose the same money as stock moves. But there are differences: no dividends, no voting rights, expiration to manage, margin requirements, and no stamp duty. Economically similar, but not identical.

You lose money - same as if you owned stock. The short put obligates you to buy at the strike price. If stock is at 300p and your strike is 500p, you're effectively down 200p per share. This is the key risk - synthetic has the same downside as stock.

No! That's the point. You create 'synthetic' ownership without buying actual shares. You buy a call option and sell a put option. The broker will require margin for the short put, but you don't need to buy stock.

Long call alone has: delta ~50 (half stock exposure), significant time decay, and limited risk. Synthetic Long has: delta ~100 (full stock exposure), minimal time decay, but unlimited risk like stock. Synthetic gives full participation; call gives leveraged but partial participation.

ATM synthetic (same strike for call and put) gives true stock-equivalent exposure at the current price. Split-strike (different strikes) can be structured for zero cost with a buffer zone. Use ATM for clean stock replication; use split-strike for cost-free entry with acceptable buffer.

Roll 2-3 weeks before expiration to avoid last-week gamma/assignment risk and maintain liquidity. If underlying has moved significantly, adjust strikes to ATM at the new price. Roll cost should be minimal if position is near ATM.

Broker requires margin for the short put (typically 15-25% of notional). This is less than buying stock outright, but you must maintain this margin. If the underlying drops, margin requirement increases. Always have buffer for adverse moves.

You'll receive shares at the strike price (debit your account). You then own actual stock. Options: (1) Keep the shares, (2) Sell immediately, (3) Sell covered calls against them. Assignment converts your synthetic to real stock ownership.

When dividends are announced, they're priced into options. The call becomes relatively cheaper, the put relatively more expensive. Net effect: synthetic becomes slightly better for you on high-dividend stocks (you're short the put). But you still don't receive the actual dividend.

Create multiple synthetics for the capital that would buy one lot of stock. Example: £5,000 buys 1,000 shares OR creates 3-4 synthetics (depending on margin). This gives 3-4x exposure. WARNING: Also 3-4x the risk. Only for high conviction with risk management.

Potentially. Selling stock triggers CGT. Keeping stock and hedging with synthetic short would maintain economic exposure while potentially deferring gain. However, HMRC may view certain structures as 'disposal'. Consult tax advisor for specific situation.

Market makers use synthetics to hedge their option inventory. If they've sold calls to retail (short call exposure), they create synthetic long to neutralize delta. Cheaper than buying stock, no stamp duty, easier to adjust. They're constantly managing synthetic/stock equivalence.

Both provide delta-100 exposure to underlying. Differences: Synthetic uses options (more strikes, expirations), futures are standardized. Futures have daily margin settlement, synthetics don't. Futures may have different roll costs. For index exposure, futures often simpler; for single stocks, synthetic often better.

Treat synthetic notional as equivalent to stock position. Include in: (1) Total equity exposure, (2) Sector concentration, (3) VaR calculation, (4) Margin stress tests. Don't undercount synthetic just because it uses less capital - it has full notional risk.