Synthetic position

A synthetic position can be created by buying or selling the underlying financial instruments and/or derivatives.

If several instruments which have the same payoff as investing in a share are bought, there is a synthetic underlying position.

In a similar way, a synthetic option position can be created.

For example, a position which is long a 60-strike call and short a 60-strike put will always result in purchasing the underlying asset for 60 at exercise or expiration.

One advantage of a synthetic position over buying or shorting the underlying stock is that there is no need to borrow the stock if selling it short.

Another advantage is that one need not worry about dividend payments on the shorted stock (if any, declared by the underlying security).

The synthetic long put position consists of three elements: shorting one stock, holding one European call option and holding

is the spot price of the stock at option expiration.)

At expiry the stock has to be paid for, which gives a cashflow