Synthetics

Question 1

Synthetics Underlying

Answer 1

• Synthetic long underlying has the same characteristics as a long underlying contract, but will not actually become an underlying contract until expiration
  ○ Example: Long June 100 call; Short June 100 put
• Synthetic short underlying is the opposite
  ○ Example: Short June 100 call; long June 100 put
• Synthetic long underlying = long call + short put
• Synthetic short underlying = short call + long put
  Where all options expire at the same time and have same exercise price
• For each one point rise in the underlying instrument, a synthetic long position will gain approximately one point in value
  ○ Vice versa for short synthetic
• The delta of a synthetic underlying position is therefore 100 approximately
  The delta of the June 100 call is 75 and the June 100 put will be -25

Question 2

Synthetic long call

Answer 2

long an underlying contract + long put

Question 3

Synthetic Short Call

Answer 3

short an underlying contract + short put

Question 4

Synthetic long call

Answer 4

short an underlying contract + long call

Question 5

Synthetic short put

Answer 5

long an underlying contract + short call

Question 6

Synthetic Options

Answer 6

4 additional synthetic contracts
- To remember which synthetic is which use the following:
○ If we trade a single option and hedge it with an underlying contract, we have the same position, synthetically in the companion option
The companion option being the opposite type either a call or put, a the same exercise price

Question 7

Synthetic long underlying

Answer 7

Long call + short put

Question 8

Synthetic short underlying

Answer 8

short call + long put

Question 9

Synthetics Underlying

Answer 9

• Synthetic long underlying has the same characteristics as a long underlying contract, but will not actually become an underlying contract until expiration
  ○ Example: Long June 100 call; Short June 100 put
• Synthetic short underlying is the opposite
  Example: Short June 100 call; long June 100 put
• For each one point rise in the underlying instrument, a synthetic long position will gain approximately one point in value
  ○ Vice versa for short synthetic
• The delta of a synthetic underlying position is therefore 100 approximately
  The delta of the June 100 call is 75 and the June 100 put will be -25

Question 10

Six Basic Synthetic Contracts

Answer 10

1. Long and short an underlying contract
2. Long and short a call
3. Long and short a put

Question 11

Synthetic Greek Considerations

Answer 11

• We know the gamma and vega of an underlying is 0, therefore:
  ○ The gamma and vega of these combinations must also add up to 0
• In some cases the theta in a synthetic wil not add up to 0 because of the cost of carry associated with either the underlying or the options
  If we are dealing w futures contracts that are subject to futures type settlement then there is no cost of carry for the options or the underlying. In this case the the companion calls and puts wil have the same theta