Buy Stock/Buy Put

A.K.A. Synthetic Long Call or Married Put

investment

Opinion: Bullish to very bullish.

Example:

Long 1 Oct 60 Put @ 4 1/4
Long 100 Shares XYZ @ $60

Description: The purchase of a Put, while owning shares in XYZ, is a strategy with a limited loss and (after subtracting the Put premium) unlimited profit.

Synthetic: As long as the Put is owned, the strategy’s risk/reward profile is equivalent to a long Call.

When to use: When stock ownership is desired yet investor is concerned about near-term downside risk.

Profit & Loss Characteristics: Profit potential is unlimited. Losses limited as long as the Put option is owned.

Break-even Point: Purchase price of XYZ stock + premium paid for Put.

Time Decay: Negative. Over time, the time value portion of the Put erodes (i.e., decays). At expiration, the Put’s value will equal its intrinsic value.

Volatility: Changes in the Put option’s implied volatility has an effect on the “time value” portion of the option’s premium.

If volatility increases, options increase in price. If volatility decreases, options decrease in price.

Thus, a change in the Put option’s implied volatility has the same effect as changing the number of days remaining until the option’s expiration: an increase in volatility is like adding more days to the life of an option.