Synthetic Call Option

A synthetic call option replicates the payoff of a standard call option without buying the option itself. You construct it by holding a long position in the underlying asset combined with a long put option on that same asset. The combination gives you the upside if the price rises while capping your downside at the put's strike price, which is functionally identical to owning a call.

Think of a synthetic call like building a burger from scratch instead of ordering one: the ingredients differ, but the result on your plate is the same.

How the Construction Works

The relationship between calls, puts, and the underlying asset is governed by put-call parity, a foundational options pricing principle. Put-call parity states that the value of a call option equals the value of a put option with the same strike and expiry, plus the current price of the underlying asset, minus the present value of the strike price.

Rearranging that equation gives you the synthetic call formula. To synthetically replicate a call, you buy the stock and buy a put option with your chosen strike price and expiry date. If the stock rises above the strike, your long stock position captures the gain. If the stock falls below the strike, the put option limits your loss to the difference between your entry price and the strike.

Why Traders Use Synthetic Calls Instead of Real Ones

Synthetic calls make the most sense when direct call options are unavailable, illiquid, or overpriced relative to the equivalent put. In certain markets, particularly for individual equities with thin options volume, implied volatility on calls can run meaningfully higher than on equivalent puts due to demand imbalances. Constructing the synthetic instead lets you take the same economic position at a lower net cost.

Institutional traders also build synthetic positions to manage regulatory restrictions. Some funds are prohibited from holding naked options but are permitted to hold equity plus puts. The synthetic call delivers the desired exposure within those constraints.

Synthetic Call vs. Real Call: Key Differences

Protective Put as the Core Mechanism

The long stock plus long put structure is also called a protective put strategy. It is one of the most common hedging tools in portfolio management. You already own the stock and want to protect against a sharp decline. Buying a put option converts your existing position into something that behaves like a call: unlimited upside if the stock keeps rising and a defined floor if it falls.

For example, if you own 100 shares of a company at $50 per share and buy a put with a $45 strike, your maximum loss is $5 per share regardless of how far the stock falls. Your position now looks and acts like a $45-strike call on the stock.

Risks and Limitations of the Synthetic Call

The capital requirement is the biggest practical limitation. A real call option requires only the premium, perhaps $3 to $5 per share. A synthetic call requires you to own the stock, which means deploying the full per-share price. This dramatically reduces the leverage that makes options attractive to speculative traders.

There is also the ongoing cost of put options to consider. If you maintain a protective put position by rolling the put every month or quarter, the cumulative premium expense can erode your returns significantly over time. Many long-term investors run the math and conclude that the protection is too expensive relative to the probability of needing it.

Delta and How the Synthetic Call Behaves

The delta of a standard call option ranges between 0 and 1. A call that is deep in the money has a delta close to 1, meaning it moves nearly dollar-for-dollar with the stock. A synthetic call constructed from long stock plus long put behaves similarly. The long stock contributes a delta of 1. The long put has a negative delta between -1 and 0, which varies with the option's moneyness. The combined delta mirrors that of a call option with the same strike and expiry.

This delta behavior means that as the stock rises, the put moves further out of the money and the synthetic call increasingly resembles pure stock ownership. As the stock falls toward and below the put strike, the put gains in value and offsets the stock's losses, producing the floored loss profile that defines the synthetic call's payoff.

Sources:
https://www.cboe.com/education/
https://www.sec.gov/investor/pubs/options.htm
https://www.finra.org/investors/investing/investment-products/options