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Market Measures

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Covered Call vs Synthetic Covered Call

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In this segment of Market Measures, Tom and Tony discuss covered calls and synthetic covered calls.

A covered call consists of buying 100 shares of stock and selling an OTM call. A synthetic covered call consists of selling an ATM Put and buying an ATM call, which gives us our long stock synthetic, we then sell an OTM call against this synthetic stock.

Study
  • SPY, 2006-Present
  • 45 DTE options
  • Simulated
    • Long Covered Call - long 100 shares of stock, short 30 delta call
    • Synthetic Covered call - short 50 delta put, long 50 delta call, short 30 delta call
  • Managed at 50% of max profit or held to expiration
    • Max profit is NOT net credit, but the possible profit on the stock/synthetic stock + the short call premium
Results
  • Utilizing options, we can generate a synthetic stock position to implement in place of a traditional covered call.
  • Historically, the classic and synthetic positions have seen very similar profit and successful results.
  • The buying power difference between a covered call and a synthetic covered call is drastic. Especially for a short term position, the synthetic offers compelling return on capital benefits.

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