Background

• The first synthetic option strategy was developed in the early days of organized option trading. At first, only call options were available, which increase in value of the underlying stock increase in price. Put options, which increase in value as the stock price declines were not available so traders developed synthetic puts to give the same return characteristics as a put options. If a trader short sells stock and buys a call option the return characteristics are the same as owning a put option on the stock.
  
  Currently, synthetic option strategies are used to generate returns equal to owning or selling short the underlying stock. The advantage of the synthetic strategy is that less cash may be required to enter the position than the margin requirement to actually buy or short the stock. Synthetic strategies can also be used to change a call strategy into a put, or the other way around.
  
  

Strategies

• To set up a synthetic stock position using options, a trader can buy a call and sell a put to equal owning the stock and buy a put and sell a call to equal short selling the stock. These positions will have the same price movement as the underlying stock---if the value of the stock moves up $1,000 the value of the synthetic long stock position will have the same gain.
  
  Calls can be converted into puts and puts into calls by using the following strategies---a long position means the trader has bought the option and a short position occurs when a trader sells and option.
  
  A long call is converted to a synthetic long put by selling (short) stock. Convert a long put to a synthetic long call with a stock purchase. A short call becomes a synthetic short put again with a stock purchase. Short puts are turned into synthetic short calls when stock is sold short.
  
  There will be variations between the costs of a synthetic position and an actual option position because involving a stock purchase or sale can result in some price variations. Traders need to be intimately aware of synthetic options or their planned strategies may end up with unintended results if a combination of trades results in an unplanned synthetic position.