Options Synthetics

A synthetic strategy is a strategy which produces the same risk/reward profile as another strategy, but is constructed using different instruments. Almost all option trades have synthetic equivalents.

long underlying = long call + Short put
long call = long put + Long underlying
long put = short underlying + Long call
short underlying = long put + Short call
short call = short put + Short underlying
short put = short call + Long underlying

Why to use a synthetic strategy?

So why use a synthetic strategy? A synthetic strategy may provide a cheaper entry into a position, or a more effective way to use the option market at the particular time. Professional traders use synthetics to price different instruments. A comparison of different ways of achieving the same position can assist in identifying which options are over or undervalued.

The use of synthetics is usually more applicable to professional traders and market makers, however, there will be times when a synthetic alternative may be preferable for the private investor. An understanding of synthetics can increase an investor’s understanding of options in general.

Options traders should be aware that the more complex the strategy, the higher the transaction charges are likely to be when entering and exiting the position.