Synthetic Position

Synthetic Positions are a combination of instruments (e.g. Options or stocks) that are identical in terms of profit/loss pay-off features to those of another stock or option position.

In most cases, the synthetic position is more complex, i.e. it requires multiple Options and often the Underlying asset also, however, this is not always true. For example, naked puts are considered synthetic covered calls, but only require a single position: the Short Put.

The majority of Synthetic positions depend on the Put-Call Parity relationship where a Put or Call and Cash or Underlying (e.g. stock) are of equivalent value.

There are six common synthetic positions:

1. Synthetic Long Stock = Long Call + Short Put
2. Synthetic Short Stock = Short Call + Long Put
3. Synthetic Long Call = Long Stock + Long Put
4. Synthetic Short Call = Short Stock + Short Put
5. Synthetic Short Put = Short Call + Long Stock
6. Synthetic Long Put = Long Call + Short Stock

The main benefit of synthetic positions is increased flexibility. They offer a method to adjust an existing strategy without closing it and re-opening it again (and therefore incurring commissions and other transaction costs). They are of particular relevance where the trader holds the Underlying stock and option is based on.