Synthetic Options: A synthetic option is a combination of two or more options to yield a particular risk profile. That is, the risk profile that will be generated by one option is sought to be generated by combining multiple options. This enables greater flexibility in owning different risk profiles by withdrawing from certain options depending on evolving situations.
Different risk profiles and their synthetic options are given below:
1) Long Call = Long Put + Long Future
2) Short Call = Short Put + Short Future
3) Long Put = Long Call + Short Future
4) Short Put = Short Call + Long Future
5) Long Future = Long Call + Short Put
6) Short Future = Short Call + Long Put
Note: Above equations show the relationship among Call option, Put option and Futures. Cost in the form of premium is ignored. We are considering only the gross pay-off profile. Long means purchase, Short means sale.
Different risk profiles and their synthetic options are given below:
1) Long Call = Long Put + Long Future
2) Short Call = Short Put + Short Future
3) Long Put = Long Call + Short Future
4) Short Put = Short Call + Long Future
5) Long Future = Long Call + Short Put
6) Short Future = Short Call + Long Put
Note: Above equations show the relationship among Call option, Put option and Futures. Cost in the form of premium is ignored. We are considering only the gross pay-off profile. Long means purchase, Short means sale.
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