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Synthetic Long/Short

Every options position is secretly a stock position plus some other options. Synthetics make this explicit.

A synthetic long buys a call and sells a put at the same strike and expiry. The result is a position that behaves identically to owning the underlying. Dollar for dollar. Tick for tick. A synthetic short does the opposite (buy put, sell call). This is put-call parity in action.

Why bother when you could just buy the asset? Because sometimes you can't. Because sometimes the options market gives you a better price. Because sometimes you need the leverage. And because understanding synthetics is how you learn to see through every options position to the stock position hiding inside.

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Synthetics are the Rosetta Stone of options. Learn to read them and every position decomposes into pieces you already understand. Long call = long stock + long put. Short put = long stock - long call. Once you see it, you can't unsee it.

What You Do (Synthetic Long)​

The Setup
Buy1 call at strike K
Sell1 put at same strike K, same expiry
Max Profit
Unlimited (upside)
Max Loss
Full downside to zero
Delta
~1.0 (identical to stock)
Cost
Near zero at ATM

Worked Example​

BTC at 94,800. Buy the 95k 30-day call for 3,450. Sell the 95k 30-day put for 3,650.

Net credit: 200 (the small difference reflects interest rates and dividends; in crypto, this is the funding/basis).

BTC rallies to 102,000. Your call is worth 7,000, your short put expires worthless. Profit: 7,200 + 200 initial credit = 7,400. If you'd bought BTC spot, you'd have made 7,200. The synthetic slightly outperformed because of the basis.

BTC drops to 87,500. Your call is worthless, you owe 7,500 on the short put. Loss: 7,500 - 200 credit = 7,300. Same as spot. You are the underlying.

How the P&L Works​

The payoff is a straight diagonal line, identical to owning the underlying:

  • Above K. The call is ITM, the put is OTM. You profit like a spot holder.
  • At K. Both ATM. Net zero (if entered at zero cost).
  • Below K. The put is ITM against you, the call is worthless. You lose like a spot holder.
Spot at Expiry$100k
$70k$130k
Net Cost$0k
$0k$5k
BE $100k$0+$30k-$30k$70kK $100k$130kSpot Price at ExpiryP&L
Settlement
$100k
P&L
+0.0k
Max Loss
Substantial
Max Gain
Unlimited

Why Synthetics Win​

Use Case
Why Synthetic Wins
Avoid perp funding
Synthetic longs have no funding rate. In trending markets, perp funding can cost 50-100 bps per day. That adds up fast.
Capital efficiency
Options margin is often 20-30% of notional vs 100% for spot. Same exposure, less capital locked.
Short selling
Synthetic short avoids borrow fees, locate requirements, and the possibility of a short squeeze forcing a close.
Access
Some assets are hard to trade directly but have liquid options. Synthetics give you equivalent exposure.
Arbitrage
If synthetic price diverges from spot, arb desks capture it. This is called "reversal/conversion" arbitrage and it keeps put-call parity honest.

Greeks at a Glance​

Greek
Synthetic Long
Synthetic Short
Delta
+1.0
-1.0
Gamma
~0
~0
Theta
~0
~0
Vega
~0
~0

The Greeks of a synthetic are nearly identical to the underlying: delta of 1.0 (or -1.0), and negligible gamma, theta, and vega because the long and short option legs offset. That's the whole point. You've reconstructed the underlying from its option components.

Common Mistakes​

Common Mistakes
The mistakeForgetting the short put has unlimited downside. "I sold a put to finance my call, it's basically free."
The realityA synthetic long has the same risk as owning spot. If BTC drops 50%, you lose 50% of notional on the short put. The put financing the call doesn't make this a free trade -- it makes it an equivalent-risk trade.
The mistakeNot monitoring the basis. Entering the synthetic without checking whether spot is cheaper.
The realityIf the synthetic costs more than spot (call premium > put premium by more than the carry), you're overpaying for the same exposure. Check the basis. Sometimes spot is the better trade.

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