Synthetic Long Call Option Trading: Profit & Loss Calculations: Options, Futures, Derivatives & Commodity Trading

# Synthetic Long Call Option Trading: Profit & Loss Calculations

Details about Profit & Loss Calculations for Synthetic Long Call Option Trading
Continuing further from Synthetic Long Call Option Trading: Explained with Example:
One question that should come to your mind - Why should someone create a Synthetic Long Call Option position when you already have the "real" call options available for trading?
The answer is that sometimes there are lots of restrictions on various market participants on the kind of positions they can take. For e.g., a mutual fund manager who collects money from common public may not be allowed to bet all the inestors money into the derivatives market, as derivatives trading is nothing less than betting with a net result of "all or nothing" kind of returns. Hence the mutual fund manager may not be able to trade entirely in long call options. Then there can be a requirement for a trader to create a "hedged" position which might require him to create a "Synthetic" long call or long put position (see example below)

What is the maximum profit possible in Synthetic Long Call Option Trading?
The maximum profit possible in Synthetic Long Call Option Trading is UNLIMITED.
To understand it, look at the NET BLUE PAYOFF function - the farther the underlying stock price moves i.e. higher, the more profits the trader makes.
You should reduce the price of the option paid plus price of the stocks paid before making the profit calculation.
Profit in Synthetic Long Call Option Trading = Price of Underlying - Purchase Price of Underlying - Premium Paid

What is the breakeven point for Synthetic Long Call Option Trading
Breakeven point is no-profit-no-loss position. As seen in the BLUE payoff function, the breakeen point is where the BLUE graph crosses the horizontal zero line and that is at \$55.
Mathematically, it comes to (Price of stocks + Price of Put Option) = \$50 + \$5 =\$55.

It means that the underlying stock should move atleast to \$55 for this synthetic long call position to become profitable to the trader.

What is the maximum loss in Synthetic Long Call Option Trading
The maximum loss in a synthetic long call option position is limited, as demonstrated by the horizontal part of the BLUE colored payoff function.
Loss in Synthetic Long Call Option Trading = Premium Paid + Commissions Paid
Let's now see the Greeks for Synthetic Long Call Option Trading: Delta, Gamma, Rho, Vega Theta
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