A synthetic covered call is an options strategy that replicates the risk and reward profile of a traditional covered call but with a much lower capital requirement. It is created by selling an in-the-money (ITM) put option instead of owning 100 shares of stock and selling a call option. This strategy profits from premium income and is capital-efficient, but unlike a traditional covered call, it does not generate dividends.

 

How it works

• Traditional covered call: Buy 100 shares of stock and sell a call option against those shares.
• Synthetic covered call: Sell one in-the-money (ITM) put option.
  • The sale of the ITM put generates premium income.
  • The risk profile is similar to owning the stock and selling a call.
  • This strategy requires significantly less capital than buying the shares outright, notes this YouTube video and this YouTube video. 

Benefits

• Capital efficiency: Requires less upfront capital compared to buying 100 shares.
• Income generation: Generates premium income from selling the put option.
• Simplified position: Creates a similar risk profile to a covered call using only options. 

Risks

• Profit is capped: Like a traditional covered call, the profit potential is limited.
• No dividends: You do not own the underlying stock, so you will not receive any dividends.
• Potential for loss: If the stock price falls, you are obligated to buy the shares at the strike price, but you will have the premium received from the put sale to offset some of the loss.