Synthetic Options Strategy

The Synthetic Options Strategy is a powerful technique that replicates the payoff of traditional options using a combination of the underlying asset and other options. Traders use synthetic positions to mirror long or short calls, puts, or even stock holdings — often with greater flexibility and capital efficiency.

Structure

• Synthetic Long Call: Long stock + Long put
• Synthetic Long Put: Short stock + Long call
• Synthetic Long Stock: Long call + Short put (same strike & expiry)
• Synthetic Short Stock: Short call + Long put (same strike & expiry)

Profit & Loss Profile

• Payoff: Mimics the target option or stock position
• Max Profit: Varies by structure — often unlimited for synthetic calls
• Max Loss: Defined by the protective leg (e.g., long put)
• Capital Efficiency: Often requires less margin than direct stock ownership

Ideal Market Conditions

• Use synthetic calls in bullish markets
• Use synthetic puts in bearish markets
• Use synthetic stock positions when direct ownership is costly or restricted

Example

Suppose a stock is trading at $100. To create a synthetic long call:

• Buy 100 shares at $100
• Buy 1 ATM put with a $100 strike

This setup mimics the payoff of a traditional long call — limited downside and unlimited upside.

Risks & Considerations

• Requires careful management of both legs
• Assignment risk on short options
• Time decay and volatility can impact performance