Synthetic Position

A synthetic position is a trading strategy that mimics the risk and reward profile of another position using a combination of options and/or the underlying asset. Instead of buying or selling the asset directly, traders use options to replicate its behavior while potentially benefiting from lower capital requirements or different tax treatments.

How Synthetic Positions Work

By combining different options (calls and puts) with or without stock, traders can replicate long, short, or neutral positions. Synthetic positions are often used for hedging, speculation, or adjusting risk exposure without directly buying or selling the underlying asset.

Common Types of Synthetic Positions

• Synthetic Long → Replicates buying the stock using options
• Synthetic Short → Replicates short selling a stock using options
• Synthetic Covered Call → Uses a short stock position with a long call
• Synthetic Straddle → Combines calls and puts to mimic a traditional straddle

Traders use synthetic positions to adapt to market conditions, hedge risk, or optimize capital efficiency while maintaining similar risk and reward characteristics as the actual asset.

See also: Synthetic Short and Synthetic Long