Synthetic position
A synthetic position is a combination of constructed to replicate the profit and loss profile of owning, or shorting, the underlying directly, without actually buying or selling the shares themselves. It relies on the pricing relationship described by , which shows that a call, a put, and a position in the are all mathematically linked to one another.
A synthetic long stock position is created by buying a call and selling a put at the same and expiration. This combination behaves almost exactly like owning the shares outright, gaining dollar for dollar as the rises above the strike and losing dollar for dollar as it falls below it, but it is built entirely from rather than the itself. A synthetic short stock position does the reverse, selling a call and buying a put at the same strike and expiration, mimicking the payoff of a short sale without having to actually borrow and sell shares.
Traders use synthetic positions for several reasons, including tying up less capital than buying or shorting the directly, working around restrictions on shorting a particular , or taking advantage of a pricing gap between the market and the itself. Because a synthetic position is built from , it inherits option-specific considerations that a plain position does not have, including sensitivity to and the need to actively manage the position as expiration approaches, rather than being able to simply hold it indefinitely the way an actual share position can be held.