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Synthetic position

Combining options (and sometimes stock) to replicate another instrument’s payoff — e.g. a call plus a short put behaves like long stock.

A synthetic position uses options (and sometimes stock) to recreate the payoff of another instrument. The classic building block comes from put-call parity: a long call plus a short put at the same strike and expiry behaves almost exactly like owning 100 shares. Swap the legs around and you can manufacture short stock, a covered call, or a protective put out of pieces you already have.

Traders reach for synthetics when the direct route is awkward or expensive. If shares are hard to borrow, a synthetic short (short call plus long put) gives you the same directional exposure without locating stock. Market makers also use them to lock in an arbitrage or to shift a position without unwinding every leg.

The common mistake is treating a synthetic as free of its parts. You still pay two premiums, carry assignment risk on the short leg, and owe the same margin as the real thing. Dividends and early exercise can also break the neat parity relationship, so check the borrow cost and ex-dividend dates before assuming the two are interchangeable.

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Call Put Strike price Premium Expiration In the money (ITM)At the money (ATM)Out of the money (OTM)Intrinsic value Time value (extrinsic)Delta Gamma Theta Vega Implied volatility (IV)Open interest Assignment Exercise Spread Break-even Probability of profit (POP)Assignment risk / early assignment LEAPS Naked (uncovered) option Rho Historical volatility (HV)Volume Bid-ask spread Moneyness Covered call Cash-secured put Vertical spread Iron condor Straddle Strangle Rolling Margin Max pain American-style option European-style option Contract multiplier Debit vs credit Volatility skew The Greeks Underlying Hedge Leverage Expected move Notional value Protective put Collar Butterfly spread Iron butterfly Calendar spread Diagonal spread Credit spread Debit spread Bull call spread Bear put spread Ratio spread The wheel strategy Poor man’s covered call (PMCC)Box spread Put-call parity Pin risk IV crush IV rank / IV percentile Ex-dividend date Deep in the money Weeklys 0DTE (zero days to expiration)Order types (to open / to close)Buying power reduction Cash settlement Market maker Slippage Mid price Black-Scholes model

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