I get a few PMs wanting to discuss various option strategies and I find myself quite often explaining exactly the same concept to help the person understand the strategy they are proposing. That is the concept of "synthetics".

What is a synthetic? In the real world, a synthetic is somthing artificial that mimics something natural. So vinyl is synthetic leather and so on. In the options world, a synthetic strategy is one that mimics a natural strategy.

So if we are looking at a straight out bought call option, we can consider that the "natural" strategy. A synthetic call is any strategy that duplicates the risks and rewards of the natural.

A strategy modeler is an indispensable tool for looking at naturals and their synthetics. You can download one free from: http://hoadley.net/options/strategymodel.htm

Why is this useful? To fully understand the strategy proposed, to simplify strategies, extra flexibilty, minimize margin.

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