Synthetic Option Positions

One of the advantages of trading options is their virtually unlimited flexibility. For any strategy or position considered there are numerous possibilities. If one is to consider all of the different strike prices and expirations to choose from the universe is huge.  Now consider for a moment that for every option position there also exists a synthetic equivalent.

Say for example that you are considering purchasing a long call. Hypothetically, there are ten strikes for that option and also ten different expirations that could be used. That means that there are 100 different call options to evaluate to see what fits your market prognosis the best.

Now consider that there is also a synthetic equivalent to a long call. The equivalent is long stock plus a long put. There is only one long stock position to consider, but hypothetically assume that there are also ten strikes and ten expirations to consider for the long put. That means that in addition to the 100 call options to evaluate, you can also evaluate 100 long put positions to combine with the long stock. So now you have 200 different positions to consider.

That’s the beauty of using options, the possibilities are virtually unlimited and there is is no limit to the amount of creative thinking that can be applied.

Remember for each position there exists a synthetic equivalent. Here’s a table of the basic ones.

Long Stock = Long Call + Short Put

Short Put = Long Stock + Short Call

Long Put = Short Stock + Long Call

Long Call = Long Stock + Long Put

Short Call = Short Stock + Short Put

Short Stock = Long Put + Short Call

Since there are many complex option strategies to use, it makes sense that a synthetic equivalent could be used for any of the legs of a normal option strategy if it is advantageous.

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About sellacalloption

Author, Radio Show Host and Portfolio manager and chief option strategist for IWC Asset Management.

Posted on April 10, 2012, in Option Basics and tagged , , . Bookmark the permalink. Leave a comment.

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