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Synthetic Positions

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Synthetic Positions - Definition
A combination of stocks and/or options that return the same payoff characteristics of another stock or option position.

Synthetic Positions - Basics
There are 6 basic synthetic positions relating to combinations of put options, call options and their underlying stock in accordance to the synthetic triangle:

1. Synthetic Long Stock = Long Call + Short Put

2. Synthetic Short Stock = Short Call + Long Put

3. Synthetic Long Call = Long Stock + Long Put

4. Synthetic Short Call = Short Stock + Short Put

5. Synthetic Short Put = Short Call + Long Stock

6. Synthetic Long Put = Long Call + Short Stock

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Synthetic Positions - Why Use Synthetic Positions?
Synthetic Positions For More Flexibility
Synthetic positions allows an option trader to quickly change from one expectation to another without making a complete change to existing holdings.

Synthetic Positions For Lower Transaction Cost
In the above example, if you had done the conventional method of buying and selling positions, you would have incurred 4 transactions in all:

Write Call ---> Buy Back Call ---> Write Put ---> Buy Back Put ---> Buy Stocks

If you had used synthetic positions instead, you would have incurred only 3 transactions:

Write Call ---> Buy Stocks ---> Buy Back Call

Lesser transactions translates into lower transaction cost, which makes synthetic positions the most cost efficient way of trading in volatile times.

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