You do not need every product on the shelf. With options, you can build any payoff you want.
One of the most powerful and misunderstood aspects of options is their synthetic nature.
With the right combinations of calls, puts, and spot (or perps), you can replicate the exposure of any position, and even trade around liquidity gaps or restricted products.
What Is a Synthetic Position?
A synthetic position is a combination of options and/or the underlying asset that creates the same payoff as another instrument.
Classic examples:
- Synthetic long spot: Buy a call, sell a put at the same strike and expiry
- Synthetic short spot: Sell a call, buy a put at the same strike and expiry
- Synthetic forward: Build a future exposure with options if direct futures are not available
Why Use Synthetics?
- Circumvent restrictions or lack of liquidity in certain products
- Hedge or unwind positions without crossing the spread
- Build positions in segments to optimize margin or tax
- Access leverage and exposure in the most capital-efficient way
Common Synthetic Structures
1. Synthetic Long
Buy a call, sell a put (same strike and expiry)
Payoff is identical to holding the underlying asset
2. Synthetic Short
Sell a call, buy a put (same strike and expiry)
Payoff is identical to shorting the underlying asset
3. Synthetic Call
Long underlying, long put
Mimics the risk/reward of a long call option
4. Synthetic Put
Short underlying, long call
Mimics the risk/reward of a long put option
Real-World Uses
- Institutional desks use synthetics to trade large sizes in fragmented markets
- Retail traders can replicate perps or spot exposure without using leverage
- Liquidity mining via options in protocols that do not have deep spot or futures books
- Arbitrage when pricing is misaligned between products
On Derive
- Build any synthetic position using the options chain plus spot or perp trades
- Margin, payoff, and Greeks display live as you adjust
- Use synthetics to hedge, roll, or access otherwise unavailable exposures
- Subaccounts help you separate synthetic trades from pure options positions
Your Action Today
- Practice building a synthetic long or short using the options chain
- Check how the PnL profile matches holding or shorting the asset
- Try creating a synthetic call or put using spot and options
- Think about how synthetics could help you access or hedge markets that lack liquid perps or spot
Tomorrow, we move into statistical arbitrage with options, using Greeks and payoffs to build mean-reversion and correlation trades.
Coming tomorrow:
Day 32 – Statistical Arbitrage: Options for Mean Reversion and Correlation
Hasta manana
Cpt
CptRandlelwa
