Disclaimer: While synthetic long stock strategies are often discussed in relation to Warren Buffett, it's essential to note that there's no direct evidence suggesting he has explicitly endorsed this strategy.
Understanding Synthetic Long Stock
A synthetic long stock position is created by combining two options:
* Long call option: Gives the holder the right to buy the underlying stock at a specified price (strike price) on or before the expiration date.
* Short put option: Obligates the seller to buy the underlying stock at a specified price (strike price) if exercised by the option holder.
When these options have the same underlying stock, expiration date, and strike price, they replicate the economics of owning the stock itself.
The Charm
* Leverage:
* Reduced upfront cost: Compared to buying the underlying stock outright, synthetic long stock positions require a smaller initial investment.
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