What happens if the stock price goes down on a synthetic covered call?

[spinn]

I am reading about this strategy Buy 1 call at Current price
Sell 1 put at Current price

The internet tells me this is a synthetic covered call. I get that if the stock goes up, you own it at the current price because you are long the call.

But if it goes down the call expires worthless but you will be long the stock when the short put buys the stock. But it will be against you a bit, or more.

Is this a reasonable strategy to ultimately buy stock I think will go up?

 

[iprph90]

I think the strategy you are describing is a synthetic long stock position. PnL= owning stock

Synthetic covered call= short atm put.

 

[BKR88]

I am reading about this strategy Buy 1 call at Current price
Sell 1 put at Current price

The internet tells me this is a synthetic covered call. I get that if the stock goes up, you own it at the current price because you are long the call.

But if it goes down the call expires worthless but you will be long the stock when the short put buys the stock. But it will be against you a bit, or more.

Is this a reasonable strategy to ultimately buy stock I think will go up?

As @iprph90 said, it’s a synthetic long.
If the stock is above your strike price at expiration you’ll have a profit and below you’ll have a loss. Basically the same as if you owned the stock. Margin requirements may be less with the synthetic long than buying the stock.

 

[BMK]

In the position you have described, the call is not covered. The put is not covered. As others have noted, it is a synthetic long stock position. In theory, it will behave the same as if you were long the stock. And in practice, that usually happens. From a technical standpoint, it is not perfectly equivalent to a long stock position, because you will not collect a dividend, and it does not involve the same amount of capital as long stock. And there are other very techincal differences. But it is generally regarded as functionally equivalent to owning the stock.

You have the same exposure as long stock.

Worst case scenario is the company declares bankruptcy and the stock goes to zero. Your call expires worthless. You get assigned on the short put, and you have to buy worthless stock at your selected strike price.

 

[Quanto]

I am reading about this strategy Buy 1 call at Current price
Sell 1 put at Current price

Can you tell me which broker allows this and what your CostBase will be?
If that is allowed, then CostBase=0 would be possible, ie. a free-lunch since this equals to buying the stock for $0. So I doubt it's possible at any broker for CostBase=0.

Proof: https://optioncreator.com/stbtd0j :

 

[Quanto]

The above said looks much like a math paradox:

Current stock price is $10.
a) You can buy the stock by paying the current stock price, ie. $10.
b) You can buy the stock for $0 by using a zero-cost synthetic construct (s.a.)

The end result is the same:
If the stock rises then both cases (a and b) win the same amount, and
if the stock falls then both cases (a and b) lose the same amount.

Paradox! Isn't it?

Nope! There is a difference: b could immediately sell the stock and pocket $10...

 

[spinn]

Seems to me like it just lowers the cost of the trade. But then you end up buying a stock that is going up.

 

[BMK]

The above said looks much like a math parado

@Quanto thinks he's discovered the wheel and doesn't understand basic synthetics.

 

[Quanto]

Hey @BMK, can you do nothing else but just quoting other users? Don't you have any own opinion?

 

[2rosy]

If you're doing a covered call against a synthetic long stock then the calls cancel out and you're left with a short put.