We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Synthetic Option?

Malcolm Tatum
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The synthetic option is a product that can be used to help control and minimize losses to a company which sometimes occur due to a change in interest rates or the exchange rate of currency. At the same time, the option does maintain some potential for realizing a gain as well as acting as a controlling agent.

A synthetic option functions by utilizing a mixture of various futures and standard options to come up with an option profile that will create the desired effect. One basic example of employing a synthetic option would be to purchase futures along with buying a number of puts. This more or less will achieve the same end as buying a call, but has the potential to lock in a margin on the purchase as well.

Essentially what occurs with a synthetic option is that the process of creating this type of option artificially creates a condition that mirrors a payoff of an underlying transaction or position that has a long call and a short put that have the same expiration and strike. Making sure the long call and the short put are always at the same strike will maintain the strike at the time of exercise or expiration, so there is no chance of a loss. At the same time, this process also does not limit the chance for realizing an increase on the transaction.

One of the advantages to employing a synthetic option is that there is always the chance to make some changes as you go along. For example, if market circumstances make it advantageous, the option could be structured with a slightly lower strike put and a slightly higher strike call. This would be a good way to progress if there is some trading taking place that falls in between the strike put and the strike call. The investor is then covering an acceptable range and can maneuver easier to meet whatever conditions may come into play regarding the stock. Also, this will help to ensure that the investor does not lose money even if the stock price falls slightly. As long as the stock price is above the lower strike put, the investment remains sound and does not decrease in value.

Use of the synthetic option is not for the novice. Understanding when and how to apply it in investing requires a sound and competent knowledge of the way that the stock markets work. For this reason, the strategy of a synthetic option is best undertaken only by those who have been trading for some time and know the market well, or only at the advice of a professional investment advisor.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.