SYNTHETICS

Synthetics:

When I first started trading options I used to have a little card written with this on it. Basically it is Two or more trading vehicles packaged together to emulate another pricing vehicle or spread. Because the package involves different components, price is also different, but the risk is the same. So, for example, owning the underlying and shorting the call IS THE SAME AS being short the put (of the same strike as the call) and so on....

Long Underlying + Short Call = Short Put

Short Underlying+ Long Call = Long Put

Long Underlying + Long Put = Long Call

Short Underlying + Short Put = Short Call

Long Call + Short Put = Long Underlying

Short Call+ Long Put = Short Underlying