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Advanced Options Trading - More on Synthetic Stock Positions

Filed Under Advanced Options Trading 

More on Synthetic Stock Positions
 
Anything synthetic is made up of components that when put together in the right way can make up a completely different object. Often times, synthetic products are produced because they accomplish the same thing as the “real thing”, but there are distinct advantages in using the synthetic over the real. In the case of creating a synthetic stock position, stock options have some real advantages for certain situations.
 
Stock options and stocks are mathematical entities made up of certain measurable entities. For example, one stock has a Delta of 1.0. It is totally correlated to itself. A stock option, on the other hand, has the relational factors of Delta, Gamma, Vega and Theta, which define a specific option (derivative) with its underlying stock. When we want to create an investment in a synthetic stock position, we use stock options that will exactly mimic the movements of the actual stock. From a mathematical standpoint, we want the total Deltas of the options to match the total Deltas of the stock.
 
For example, if you have 1000 shares of XYZ stock, you would have a total amount of 1000 Deltas. If you want to construct an option position that would exactly mimic the movements of the 1000 XYZ shares, you would need to create an option position which would also have a total of 1000 Deltas.
 
The Option Pricing Model, which is in constant evolution, mathematically defines the relationship between option derivative and the underlying stock. To construct a synthetic stock position, it is essential to understand how options relate to each other and the underlying stock.
 
According to Ron Ianieri, one of the founders of Options University, If you can understand synthetic positions, then not only is it going to help you make money but also it’s going to give you a much deeper understanding of options in general. If you can create the exact same position in two different ways, then there is a possibility that one of those ways might be cheaper than the other.
 
For example, you may often times find that creating a synthetic stock position is cheaper to buy than the underlying stock. If this is the case, than the corresponding ROI will be higher. By being less expensive, a synthetic position will also allow for lower entry and exit points. When talking about the nature of stock options, we talk about flexibility and synthetic positions are just one example.
 
In the Options University Options Mastery Course, the students learn that there are six basic types of synthetic positions:
 
·        Synthetic long stock and synthetic short stock; by using a combination of a call and its corresponding put you can recreate a long stock position or a short stock position just using a call and a put.
 
·        Synthetic long call and synthetic short call; using a combination of the corresponding put and the stock you can create a long call or a short call simply using the corresponding put and the stock.
 
·        Synthetic long put and synthetic short put; by using a combination of the stock and the call, you can create a long put or a short put, depending on the combination I use.
 
For everything you want to know about stock options, contact the Options University at:

www.optionsuiversity.com

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