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Synthetic options position - Wikipedia, the free encyclopedia

Synthetic options position

From Wikipedia, the free encyclopedia

In finance, a synthetic underlying position is one that synthetically duplicates the payoff of a long underlying position with a long call and short put at the same strike and expiration. For example, a position which is long a 60-strike call and short a 60-strike put will always result in purchasing the underlying for 60 at exercise or expiration. If the underlying is above 60, the call is in the money and will be exercised; if the underlying is below 60 then the short put position will be assigned, resulting in a (forced) purchase of the underlying at 60.

One advantage of a synthetic position over buying or shorting the underlying stock is that it allows tweaking. For example, in the above example, one could instead long a 60-strike call and short a 55-strike put, if the stock is trading somewhere in between the two strike prices. This way, even if the stock falls a little, the position does not lose any money as long as the stock price stays above 55 at options expiration.

A synthetic underlying position has the same delta as the non-synthetic (real) underlying position.

When the underlying is stock, a synthetic underlying position is sometimes called synthetic stock.

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