Synthetic Covered Call

A synthetic covered call replicates the covered call payoff without actually owning the stock.

How It Works

Instead of: Long stock + Short call

Use: Short put (at same strike as covered call would use)

Why They're Equivalent

Both positions have identical profit/loss profiles:

  • Same max profit
  • Same max loss
  • Same break-even

    • Example

    Traditional Covered Call:

  • Buy 100 AAPL at $230
  • Sell $240 call for $4
  • Max profit: $1,400 (if stock at $240+)

    • Synthetic (Short Put):

  • Sell $240 put for ~$14
  • Max profit: $1,400 (if stock at $240+)

    • Same outcome, but put requires less capital!

    Advantages

  • Less capital - No need to buy shares
  • Simpler - One position instead of two
  • No dividend - Puts don't require owning stock

    • Disadvantages

  • No voting rights - You don't own shares
  • No dividend - Miss quarterly payments
  • Margin differences - Some accounts treat differently