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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Speculation, Hedging
Synthetic Long / Short
A combination of an ATM call and an ATM put option at the same strike and expiration that mimics going long or short on a stock.
Detail
Synthetic Long mimics the purchase of a stock by buying an ATM call and writing an ATM put on the same strike. Synthetic Short is the opposite: writing an ATM call and buying an ATM put. Both variants replicate the movement of the stock without owning it.
Synthetic Long / Short is a strategy that replaces direct ownership of a stock (long or short) with options. A Synthetic Long combines a purchase of an ATM call and a write of an ATM put with the same strike and expiration, creating a position that behaves similarly to a long stock (delta ≈ 1). A Synthetic Short is the opposite, where a write of an ATM call and a purchase of an ATM put mimic a short stock (delta ≈ -1). This strategy is cheaper than physically owning the stock, but requires margin and may be subject to assignment. It is often used for speculation or portfolio hedging.
Optimal conditions
When we don't want to hold physical shares (due to margin, for example), but want to speculate on the movement. For hedging existing stock positions. Suitable for a strongly growing/falling market.
Max profit
Synthetic Long: Unlimited growth in the stock price (like owning a stock). Synthetic Short: Profit limited by the stock falling to zero (like shorting a stock).
Max loss
Synthetic Long: A stock's fall to 0 (whole value). Synthetic Short: Unlimited loss as the stock price rises.
Risks
Same as for a stock: sharp movement against the position. Early assignment risk. Margin required for option listing. Watch out for dividends (synthetic long will not receive dividend).
Greeks
Delta ≈ 1 (Long), Delta ≈ -1 (Short). Theta (neutral if call/put have the same price). Vega: affected by changes in volatility.
Variations
Possibility to combine another call/put with the statement (synthetic covered call/put). Protection can be added (protective synthetics).
Usage example
Synthetic Long: XYZ stock is at $100, we want to speculate on growth: we buy an ATM call strike 100 (exp. 30 days), we write an ATM put strike 100 (exp. 30 days). Synthetic Short: XYZ stock is at $100, we want to speculate on decline: we write an ATM call 100 and buy an ATM put 100 (same expiration).
DTE
Short-term (30-60 days) or by horizon (can be longer for hedges).
IV (implied volatility)
A higher IV increases the option price and at the same time the margin on the statement.
Premium
The difference between the call and put price, often close to zero (therefore mimicking a stock).
Margin
Yes, the broker requires margin for a put/call statement.
Notes
Synthetic long will not receive dividend payment.
Tags
synthetic position, synthetics, synthetic long, synthetic short, long shares, short shares, call, put, delta 1, speculation, derivative
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