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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Income, Hedging
Synthetic Covered Call
Combination of a synthetic long position (long call + short put) and an additional short call option.. Alternative to a Covered Call without owning the stock.
Detail
A Synthetic Covered Call replicates the payoff of a traditional covered call without owning the underlying stock. The position is created by combining a long call option with a short put option at the same strike and expiration.
This setup mimics a long stock position, and by selling an additional call (typically OTM), the trader creates income – just like a regular covered call.
The position carries the same directional exposure and assignment risk as the traditional strategy, but with less capital required.
This strategy simulates a covered call using options only. The synthetic stock component is created by buying a call and selling a put with the same strike and expiration – this behaves like being long 100 shares.
To complete the synthetic covered call, the trader then sells a second call, usually with a higher strike (OTM). This generates income and limits upside potential.
Since there’s no actual stock ownership, capital efficiency is improved, but margin requirements apply.
It’s commonly used by advanced traders who want covered call exposure with less capital or in retirement accounts where stock ownership is limited.
Optimal conditions
Best used in moderately bullish markets where the trader seeks income with limited upside.
Ideal when stock ownership is not desired or not possible (e.g. in cash-limited accounts).
Implied volatility should be elevated to maximize premium received from the short call.
Max profit
Limited to the difference between the short call strike and the synthetic stock strike, plus total net credit received.
Max loss
Similar to holding stock: if the underlying falls significantly, losses grow rapidly.
If assigned on the short put, the trader effectively “buys” the stock synthetically and suffers downside risk.
Risks
The position carries the same directional risk as a long stock + covered call position.
If the underlying drops, the synthetic long position loses value quickly.
Assignment on the short put can happen early in high volatility markets.
Margin requirements can vary significantly across brokers.
Greeks
Delta: Close to +1 - behaves like long stock.
Theta: Positive due to short call (and put) decay.
Vega: Negative - higher IV increases cost to maintain or roll.
Gamma: Moderate - reacts to sharp movements in underlying.
Variations
Possible combinations with diagonal statements for more premium. Rolling to maintain income.
Limit risk by adding long options (protective synthetics).
Usage example
Instead of buying 100 shares of XYZ at $100, you buy 1x call at strike 100 and sell 1x put at strike 100 (same expiration), creating a synthetic long.
Then, you sell 1x call at strike 110 for $2.
If XYZ stays below 100, you’re at risk of being assigned on the put.
If XYZ expires at $110, you achieve max profit.
Above $110, gains are capped.
DTE
Short-term statements (30 days), synthetic according to strategy (can also be LEAPS).
IV (implied volatility)
Advantageous at higher IV for increased premium from the statement. Synthetic long/short behaves like a stock, so IV affects statements more.
Premium
Income from the statement of another OTM option + any net value of the synthetic.
Margin
Requires margin for the short put and short call. Some brokers may treat the position like a naked short put with stock-like exposure.
Notes
Efficient alternative to a traditional covered call.
Suitable for smaller accounts or option-only portfolios.
Be aware of early assignment risks, especially on the short put.
Consider rolling the short call to manage upside exposure.
Tags
synthetics, synthetic long, synthetic short, covered call, call statement, regular income, leverage, margin
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