The Synthetic Long Strategy is a directional options trading approach that mimics the payoff profile of owning the underlying asset without actually purchasing it. It involves combining a long call option with a short put option at the same strike price and expiry. This creates a position that behaves like a long spot position — with unlimited upside, limited downside, and potential capital efficiency.

In the forex market, synthetic longs are used by traders who want to gain bullish exposure to a currency pair without using margin for spot or futures, or who seek a structured way to trade event-driven moves with defined risk.

What Is a Synthetic Long?

A synthetic long position is created by:

• Buying a call option at a selected strike price
• Selling a put option at the same strike price and expiration

The combination replicates a long position in the underlying asset, meaning:

• You profit when the asset rises
• You lose when the asset falls
• Breakeven occurs at the strike price (ignoring premium differences)

This strategy is sometimes referred to as a “synthetic future” or “combo” position.

How the Strategy Works

1. Choose Strike and Expiry
   Use an at-the-money (ATM) strike to closely match spot price action.
2. Buy the Call and Sell the Put
   Construct the trade simultaneously using the same expiration date.
3. Track Underlying Performance
   As the asset rises, the call gains value while the put expires worthless.
4. Manage Risk if the Price Falls
   A drop below the strike causes the short put to become in-the-money.

Example: Synthetic Long on USD/JPY

• USD/JPY is trading at 148.00
• Buy 1-month 148.00 call
• Sell 1-month 148.00 put
• If USD/JPY rises to 150.00:
  • Call is worth 200 pips
  • Put expires worthless
  • You profit as if you were long USD/JPY

Key Benefits of the Synthetic Long Strategy

• Replicates Spot/Futures Exposure Without Holding Asset
  Ideal when direct trading is restricted or capital-intensive
• Customisable Risk
  Strike selection and expiry let you adjust your directional exposure
• Efficient Use of Capital
  Often requires less margin than holding spot or future outright
• Event-Driven Trades
  Effective for bullish views on CPI, NFP, or central bank meetings

Ideal Market Conditions

• Strong Bullish Outlook
  Expectation that the asset will rise before the options expire
• Limited Capital
  Allows traders to take directional views without tying up cash
• Liquid Option Market
  Better execution and tighter spreads in major FX pairs

Risks and Considerations

• Downside Risk Similar to Spot
  If the price falls, losses accumulate like a long spot position due to the short put
• Margin Requirements on Short Put
  Most brokers require collateral to cover short put exposure
• Time Decay and Volatility
  Net impact of theta and vega may affect position slightly
• Requires Active Management
  Especially if price approaches the short put breakeven

Risk Management Tips

• Use Stop-Loss Based on Underlying Price
  Define exit levels just like a spot trade
• Structure Around Support Levels
  Choose strikes near technical support for natural protection
• Hedge Short Put If Market Reverses
  Consider converting to a vertical spread to reduce loss potential
• Monitor Option Skew and IV
  Ensure fair pricing of both call and put legs

Use Case: Synthetic Long in EUR/USD Post-NFP

• EUR/USD is expected to rise after a weaker-than-expected NFP print
• Trader buys a 1.0800 call and sells a 1.0800 put expiring in 2 weeks
• EUR/USD rallies to 1.0950:
  • Call gains 150 pips
  • Put expires worthless
  • Synthetic long mirrors gains from direct spot exposure

Conclusion

The Synthetic Long Strategy offers traders a flexible, efficient, and leveraged way to express bullish views using options. It’s ideal for those who want directional exposure without owning the underlying or who prefer defined structures around high-impact events.

To master synthetic long setups, optimise your directional options trading, and manage risk with precision, enrol in our advanced Trading Courses tailored for macro, options, and FX traders.