Synthetic Call

What is a 'Synthetic Call'

A synthetic call is an investment strategy that mimics the payoff of a call option. A synthetic call is created by purchasing the underlying asset, selling a bond and purchasing a put option. The strike price on the put option is equal to the face value of the bond, which serves as the exercise price of the synthetic call.

BREAKING DOWN 'Synthetic Call'

A synthetic call produces the same overall payoff as a call option. The synthetic call will finish in the money when the price of the underlying asset is greater than the face value of the sold bond at the time of expiration. It will be out-of-the-money when the value of the bond is greater than that of the underlying asset. When the synthetic call is in the money, the profit is the difference between the price of the underlying asset and the face value of the bond. If the call finishes out of the money, the put option absorbs the loss from the underlying asset, with the exercise price of the put paying for the bond.

RELATED TERMS
  1. Synthetic

    A financial instrument that is created artificially by simulating ...
  2. Synthetic Futures Contract

    A position created by combining call and put options for the ...
  3. Put On A Call

    One of the four types of compound options, this is a "put" option ...
  4. Synthetic CDO

    A form of collateralized debt obligation (CDO) that invests in ...
  5. Long Jelly Roll

    An option strategy that aims to profit from a time value spread ...
  6. Bull Call Spread

    An options strategy that involves purchasing call options at ...
Related Articles
  1. Options & Futures

    Put-Call Parity And Arbitrage Opportunity

    Look at trades that are profitable when the value of corresponding puts and calls diverge.
  2. Options & Futures

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  3. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  4. Options & Futures

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  5. Options & Futures

    Writing Covered Calls On ETFs

    The strategy of writing covered calls on ETFs can limit your losses and hedge risk, but they cap your upside potential.
  6. Options & Futures

    Options Basics: What Are Options?

    An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock ...
  7. Active Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  8. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  9. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  10. Options & Futures

    NYIF Instructor Series: Synthetic Stock

    In this short instructional video Anton Theunissen explains how to replicate a levered stock using a combination of options.
RELATED FAQS
  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  3. What options strategies are best for investing in the industrial sector?

    Learn a couple of popular options trading strategies that can be used by investors seeking to enhance their profits from ... Read Answer >>
  4. What is the difference between a covered call and a regular call?

    Learn what a call option is, what two strategies call options can be used for, and the difference between a covered call ... Read Answer >>
  5. What option strategies can I use to earn additional income when investing in the ...

    Learn how a covered call or covered put option strategy can be used to earn additional income on positions in stocks in the ... Read Answer >>
  6. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center