An important characteristic of stock options is that they can be combined with other options or underlying contracts to create positions with characteristics which are almost identical to some other contract or combination of contracts.
A synthetic underlying position is an equivalent position that is constructed without actually buying or selling the underlying stock. Instead, call and put options are purchased and sold simultaneously. It's important to note that interest rates, as well as the possibility of early exercise, can cause the delta of a synthetic underlying position to be slightly more or less than 100.
The synthetic long underlying is an options strategy used to simulate the payoff of a long underlying position. It is entered by buying calls and selling an equal number of puts of the same underlying, strike price, and expiration.
The synthetic short underlying is an options strategy used to simulate the payoff of a short underlying position. It is entered by selling calls and buying an equal number of puts of the same underlying, strike price, and expiration.
Synthetic long underlying = long call + short put
Synthetic short underlying = short call + long put
By rearranging the components of a synthetic underlying position, we can create four other synthetic relationships:
Synthetic long call = long an underlying + long put
Synthetic short call = short an underlying + short put
Synthetic long put = short an underlying + long put
Synthetic short put = long an underlying + short call
Each synthetic position has a delta approximately equal to its real equivalent and will therefore gain or lose value at approximately the same rate as its real equivalent.
The graph above shows the profit/loss of being long GOOG stock.
The graph above is the profit/loss of the GOOG synthetic long underlying using the July $505 call and put. You can see they have the same risk reward.
*Special thanks to Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!
No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.