Key Concepts

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Synthetics

Synthetics are a way to artificially create a financial position with a different strategy. Derivatives allow investors to synthetically create various different positions without needing to use as much capital.

There are several ways to create synthetic positions using options. For example, having on a long call and a short put is synthetically the same thing as being long stock. One of the advantages to having this synthetic stock position instead of holding the stock is that there is a lower cost than holding outright stock. In fact, overnight, the option position could give us up to double the leverage of holding the stock. This could lead to the ability to increase our number of occurrences and therefore, the return in our portfolio. Also, many stocks can be hard to borrow so synthetically creating a short stock position by being short a call and long a put, would allow for an investor to sell short.

At tastytrade, we also use synthetics in order to participate in products that would normally be too big for us. We believe that one of the keys to trading is staying small. On the other hand, we also preach the importance in participating in an array of products in order to stay engaged in the market. For a smaller account, understanding the synthetic equivalence between different financial instruments can allow an investor in a smaller account to participate in a product such as futures. So by buying or selling 500 shares of the SPY, a smaller trader could synthetically be participating in the /ES movement without even being approved to trade the product.

Synthetics Videos