Simulating the Underlying with Options
Len Yates

Did you know there is an option strategy – involving just two options – that behaves exactly like a position in the underlying?  It's called a synthetic, because you're "synthesizing" a position in the underlying, and is like buying the stock itself.

A synthetic is constructed by buying a call and selling a put of the same strike and duration (to simulate being long the underlying), or buying a put and selling a call of the same strike and duration (to simulate being short the underlying).

Since a synthetic performs exactly the same as being long or short the underlying, the question naturally arises:  Why do a position with two transactions when you can do it with one?  Well, the fact is that the capital requirements for a synthetic can be a lot less than going long or short the stock, even when using maximum margin on the stock.

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