Synthetic Call Option: Overview, Uses, How to Trade, P&L, Risks

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Written by Arjun Remesh | Reviewed by Sunder Subramaniam | Updated on 9 July 2025

A synthetic call option is a strategy combining a long stock position with a protective put to mimic the payoff of a traditional call option. A synthetic call option allows investors to benefit from upward price movement while limiting downside risk, making it a versatile tool for managing equity exposure. 

Synthetic options emerged as a way for institutions to navigate illiquid or overpriced options markets, particularly during times of market stress or regulatory restrictions.

According to options industry statistics, strategies involving synthetic calls account for a significant portion of institutional hedging activity—especially in volatile markets. Several studies suggest that during periods of market turmoil, demand for protective puts surges, driving up their premiums and making synthetic calls more prevalent among long-term investors. 

What is a Synthetic Call Option?

A synthetic call option is a combination of a long stock position and a long put option designed to replicate the payoff profile of a standard call option. In synthetic call option,  Instead of purchasing a call option directly, an investor acquires the underlying stock and simultaneously buys a put option at the same strike price and expiration. 

This arrangement provides the right, but not the obligation, to sell the stock at the put’s strike price while maintaining exposure to potential gains from a rising stock price.

The synthetic call’s payoff structure mirrors that of a traditional call: limited downside (equal to the cost of the put and any difference between the stock price and the put’s strike) and theoretically unlimited upside as the stock appreciates. 

This makes synthetic calls particularly useful in situations where call options are unavailable, illiquid, or prohibitively expensive. Additionally, synthetic calls allow investors to tailor the strategy’s risk/reward profile by adjusting the strike price or expiration of the protective put, offering customization that standard call options may not provide.

How Does a Synthetic Call Option Work?

Long stock positon and put option protection are the key steps for synthetic call options to work.

1. Long Stock Position

To create a synthetic call, the investor first establishes or already holds a long position in the underlying stock. This long stock position provides full exposure to upward price movements, meaning any gain in the stock directly translates to profit. 

The payoff from a long stock position is a straight line: the higher the stock price rises, the greater the gain, with no cap on potential profit. 

Let’s consider an investor who decides to create a synthetic call by first taking a long position in Nifty. Suppose the investor buys Nifty at a level of 22,500. 

This means for every point Nifty goes up, the investor gains a point, and for each point it falls, they lose a point. For instance, if Nifty rises to 24,000, the profit would be 1,500 points (24,000 – 22,500). 

Nifty drops to 21,000, the loss would be 1,500 points (21,000 – 22,500). There is no cap to the gains if Nifty keeps rising, but there’s also no floor to the losses if Nifty keeps falling.

The payoff for this long position is best understood by looking at how profit and loss change as Nifty’s price moves at expiry. At the purchase level of 22,500, the position is at breakeven—there is neither profit nor loss. If Nifty ends higher, the profit grows point-for-point with the index. 

For example, Nifty closes at 23,000, the profit is 500 points. At 24,000, the profit increases to 1,500 points. On the downside, Nifty drops to 21,000, the investor faces a 1,500-point loss, and at 20,000, the loss deepens to 2,500 points.

However, this position alone leaves the investor exposed to all downside risk if the stock price falls, which is why an additional protective component is needed to complete the synthetic call structure.

2. Put Option Protection

The second step in constructing a synthetic call is purchasing a put option for downside protection. The put option provides the right to sell the stock at a predetermined strike price, thereby limiting potential losses if the stock declines sharply. 

Let us look at an example. 

Below is the scenario.

• Long Nifty: 22,500
• Buy 22,500 Put (ATM): Premium paid = 200 points
• Maximum Loss: 200 points (the put premium)
• Unlimited Upside: If Nifty rises

This protective measure transforms the risk profile, introducing a defined floor below which losses are capped.

By pairing the long stock with a long put, the investor’s maximum loss equals the difference between the stock’s purchase price and the put’s strike price, plus the cost of the put. 

The result is a payoff graph that mirrors a call option’s hockey-stick shape: flat losses below the strike price, breakeven at the cost-adjusted level, and unlimited upside above the strike.

Why Use a Synthetic Call Option Strategy?

Investors use synthetic call options to replicate the payoff of a call option when direct calls are not available or attractive. This approach is particularly advantageous for those who already own the stock and want to limit downside risk without sacrificing upside potential. 

By adding a protective put, the investor essentially transforms their stock holding into a risk-managed position that behaves like a call option.

Another compelling reason for using a synthetic call is when actual call options are illiquid or excessively expensive, which occurs during periods of heightened volatility or limited market depth. 

In such cases, constructing a synthetic call allows investors to circumvent unfavorable pricing in the options market while still achieving similar risk/reward dynamics. Long-term investors also favor this strategy to hedge portfolios during uncertain market conditions or when seeking to protect gains without liquidating core holdings.

When to Use a Synthetic Call Option?

The synthetic call option strategy is most effective when an investor already holds the stock and seeks to protect against potential losses. This scenario often arises during periods of anticipated market volatility, such as before earnings announcements or significant macroeconomic events. 

Adding a protective put helps the investor shields their equity position from sharp declines while maintaining exposure to upward moves.

This strategy also proves valuable when the stock approaches key technical levels like support or resistance, where price action tends to become unpredictable. Using synthetic calls during these times allows investors to manage risk proactively without exiting their positions. 

Additionally, when market sentiment turns uncertain or options markets reflect extreme pricing, synthetic calls provide a viable alternative for investors seeking to balance risk and reward.

How Option Greeks Affect Synthetic Call Option?

The option Greeks influence synthetic call options in ways that closely resemble traditional calls, but with notable differences due to the underlying stock component. 

Delta, which measures sensitivity to stock price changes, starts close to +1 for synthetic calls because of the long stock holding. This ensures the position responds nearly one-to-one with stock price movements, at least initially.

Gamma, which reflects the rate of delta change, remains very low for synthetic calls since the stock’s delta is static and only the put’s delta changes as the price moves. 

Theta, representing time decay, is negative because the long put loses value over time, gradually reducing the position’s overall worth if the stock remains flat. 

Vega, the sensitivity to volatility, is positive; as implied volatility rises, the protective put gains value, enhancing the synthetic call’s worth and providing additional upside beyond just stock price appreciation.

How Implied Volatility Affects Synthetic Call Option?

Implied volatility directly impacts the cost and performance of a synthetic call option by influencing the premium of the put option used for protection. 

In cases when the implied volatility is high, the price of the put increases, raising the overall cost of implementing the synthetic call strategy. This makes the protective aspect more expensive and less attractive unless the investor expects further volatility or has a strong directional view.

However, in a scenario where iimplied volatility rises after establishing the synthetic call, the value of the long put increases, benefiting the position and potentially offsetting some of the premium paid. 

For this reason, it’s generally advisable to avoid buying puts in environments where implied volatility is already at extreme levels, unless downside protection is absolutely necessary. Timing entry into a synthetic call is therefore critical to optimizing both cost and risk-adjusted returns.

How to Trade using Synthetic Call Option?

To study and understand how a synthetic call option works, we will use a combination of a long futures position and an ATM put option. A synthetic call replicates the payoff of a long call but can be structured using instruments that offer better flexibility or margin benefits.

In this example, the setup starts with a 2-month far futures contract on Bharti Airtel, bought at ₹1,850 on May 26, 2025.

One day after the future was bought, on May 27, the trader decides to protect against downside risk while continuing to hold the position for a few more weeks. Instead of buying a call—which suffers from time decay—the trader buys a long ATM put option of the same expiry (July 26) at a premium of ₹43.8. This creates a synthetic long call option.

The choice to use a synthetic call over a regular long call is based on several advantages. It replicates the payoff of a standard call option, limiting downside while retaining full upside potential. 

It’s also ideal when actual call options are overpriced or illiquid. For long-term investors or swing traders, the synthetic call offers a cost-effective hedge.

In terms of capital efficiency, the benefits are substantial. A long futures position requires approximately ₹1,55,000 in margin. If the trader wanted to hold 475 shares of Bharti Airtel directly—each priced around ₹1,841—it would cost about ₹8,75,000. 

Thus, the trader saves a significant amount of capital while gaining both the upside exposure of a long call and downside protection from the put. This makes synthetic calls a valuable tool for risk-managed directional trades, especially when planning to hold the position for weeks or months.

What are the Maximum Profit & Loss, Breakeven on a Synthetic Call Option?

The maximum profit for a synthetic call option is theoretically unlimited, as gains accrue if the stock price rises above the put’s strike price and offsets the cost of the put. Since the investor holds the stock, any appreciation in value above the breakeven point results in profit, just as with a standard long call option. 

The upside potential remains uncapped, limited only by how high the stock can climb.

Maximum loss is limited and occurs if the stock price falls below the strike price of the long put. In this case, the loss equals the difference between the stock’s purchase price and the put’s strike price, plus the premium paid for the put. The breakeven point is calculated by adding the cost of the put to the stock’s purchase price, ensuring the strategy’s risk/reward is clearly defined. 

The above visual payoff diagram depicts a flat loss region below the strike, a breakeven at stock price plus put cost, and an upward-sloping profit region above the strike, while a table can lay out these scenarios for easy reference.

What are the Risks of Synthetic Call Option?

Synthetic call options involve several risks, foremost among them being the high capital requirement due to the need to own the underlying stock. 

This significantly increases the initial outlay compared to simply buying a call option, which might not be suitable for all investors or portfolio sizes. 

The cost of the protective put reduces the overall return, especially if the stock price remains stagnant or rises only marginally.

Another critical risk lies in time decay; the value of the put option erodes as expiration approaches, potentially resulting in a loss even if the stock does not fall. 

There’s also the challenge of selecting the appropriate strike price and expiry for the put, as a poor choice can leave the position insufficiently protected or unnecessarily expensive. 

Despite the strategy’s risk-mitigation benefits, synthetic calls require careful planning and ongoing monitoring to ensure the desired outcome is achieved.

Is Synthetic Call Option Strategy Profitable?

Yes, the synthetic call option strategy is profitable when the underlying stock price rises significantly above the breakeven point. This strategy mimics the payoff of a standard long call by combining a long stock position with a protective long put. 

The profit potential is theoretically unlimited, since there is no cap to how high the stock price might climb, and every dollar increase above breakeven adds to the gains.

Unlike simply holding the stock, the synthetic call limits downside risk because the long put serves as insurance, capping losses if the stock falls. This risk management feature, however, comes at a price—the cost of the put option. The breakeven for the strategy is the sum of the stock purchase price and the put premium. Profit only occurs when the stock price exceeds this combined cost at expiration.

Is Synthetic Call Option Bullish or Bearish?

The synthetic call option strategy is a bullish options strategy. It is designed to profit from an increase in the price of the underlying stock, much like a standard long call. The investor combines a long position in the stock with the purchase of a put option, creating exposure to upward price movement while limiting risk on the downside.

This approach suits investors who expect a significant rise in the stock’s value. The long stock position provides unlimited upside potential, and the put option acts as a safety net, limiting losses if the stock collapses. The protective put ensures that the investor does not suffer catastrophic losses, but still participates fully in any appreciation above the breakeven.

What’s the Difference Between Synthetic Call vs Synthetic Put?

The key difference between a synthetic call and a synthetic put lies in their market outlooks and construction. A synthetic call is created by buying the stock and purchasing a put option, replicating the payoff of a long call. 

In contrast, a synthetic put consists of shorting the stock and buying a call option, mirroring the payoff of a long put. Below is a compari

A synthetic call is a bullish strategy, intended for investors who expect the stock price to rise. Profits accrue as the stock climbs above breakeven, while losses are capped by the put option. The synthetic put, on the other hand, is bearish. 

Profits result from the stock price dropping below the breakeven point, with losses limited by the long call.

Construction also differs in terms of underlying positions. The synthetic call involves owning the stock and buying a put, while the synthetic put requires shorting the stock and buying a call. Each strategy has a defined risk/reward profile aligned with its market view.

What are Alternatives to Synthetic Call Option Strategy?

The most straightforward alternative to a synthetic call option strategy is simply buying a call option, which provides leveraged upside exposure with limited risk and at a lower upfront cost compared to owning stock and buying a put. Below is a comparison table. 

Each alternative matches different investment goals and risk tolerances, making them viable substitutes for the synthetic call, depending on an investor’s market view and objectives.