This segment examines the many types of synthetic positions a trader can create through the use of puts, calls and stock. This should help traders gain a deeper understanding of option dynamics, allow them to maximize capital efficiency and to structure trades with the least possible complexity.
A synthetic position replicates the risk/reward profile of a strategy while constructed from a combination of option and/or stock positions. Because of the highly customizable and relative nature of options and stock, practically all positions can be replicated syntheticall by structuring the trade with different components. A table displayed the basic examples of synthetic positions. The examples were long and short stock, long and short a call and long and short a put. Another slide showed the components of a short straddle and a long straddle.
An example was shown using GPRO of how a covered call and short put can be used interchangeably. A table showed showed for both the covered call and the short put the entry price, max profit and mass loss with GPRO trading at $60.70 on July 21, 2015.
There are pros and cons for each of these synthetic positions. Several of these are listed. Most notable for bears is that a hard to borrow stock can be shorted synthetically. The other pros and cons are also worth noting.
Another example was shown comparing a long stock + collar position to a call debit spread with the same strikes as the collar. By trading the call debit spread, we remove the stock component and simplify the position.The downside is that debit call spread does not provide the benefit of delaying a tax liability. An example of a long stock and collar were compared with a call debit spread in AAPL.
It’s possible to use call spreads and put spreads interchangeably. A table was shown explaining this with examples and an actual position in LNKD was used to demonstrate one possibility.
Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for a valuable discussion about synthetic positions and how they can improve your trading.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.