Definition
Synthetic positions use put-call parity and other relationships to create equivalent exposures using different instruments. A synthetic long stock = long call + short put at the same strike. Synthetics are useful when the desired instrument is unavailable, expensive, or when regulatory/tax advantages exist. Understanding synthetics deepens comprehension of how derivatives relate to each other.
functions Formula
Synthetic Long Stock = Long Call + Short Put (same strike & expiry)
lightbulb Example
Stock at $100: buy the $100 call for $5, sell the $100 put for $4. Net cost: $1. The position gains/loses approximately $1 for every $1 stock move, just like owning the stock, but for $1 instead of $100.
verified_user Key Points
- Uses put-call parity to create equivalent exposures
- Synthetic long = long call + short put
- Synthetic short = long put + short call
- Useful for leverage, cost, and regulatory advantages