Have you ever heard of synthetic trading?
In a nutshell, it’s a unique trading strategy, where traders use combinations of options contracts—and sometimes the underlying stock—to replicate the risk/reward profile of another position.
The type of position a trader might try to replicate could include owning stock, shorting stock, or holding a single call or put without actually holding that exact position.
Let’s say you were following a stock trading at $100, and wanted to go long on the asset. One way to trade it synthetically would be:
- Buy one at-the-money call
- Sell one at-the-money put
Both of these options would have the same strike price and expiration date.
These two positions would still bank on that stock moving in the same direction, while giving you the same amount of risk-to-reward ratio as going long on the underlying asset.
Of course, there’s more than one way you can consider putting synthetic trading into action.
In his most recent appearance on MarketMinds, Mike Shorr spent part of the episode going over synthetic trading. He covered six different strategies traders can consider going about it, and reviewed how each one works.
The analysis, insights, and strategies shared by Prosper Trading Academy’s coaches in Prosper Insider are strictly for educational and informational purposes only. All content reflects the personal opinions of the coaches and should not be construed as specific investment advice or recommendations. Any examples discussed are illustrative in nature and do not represent actual live trade signals or instructions to buy or sell securities. Trading involves risk, and individuals should carefully evaluate their own financial situation before making investment decisions.
Mike covers:
- How call-put parity ties into synthetic trading
- Three ways each synthetic trading works for going long and shorting assets
- Bearish and bullish synthetic trading strategies
- When to incorporate stocks, calls, and puts
- The differences between synthetically trading stocks and options
