Synthetic Position
A combination of options and other instruments that replicates the payoff profile of a different asset or strategy.
What is Synthetic Position?
A synthetic position is a combination of two or more financial instruments designed to replicate the risk and return profile of another instrument. The most fundamental synthetic relationships derive from put-call parity: a long synthetic stock position is created by buying a call and selling a put at the same strike and expiration; a short synthetic stock position reverses this. Synthetics allow investors to replicate desired exposures when the underlying instrument is unavailable, illiquid, or taxed differently, or when margin requirements are more favorable using options. Synthetic long positions using options carry the same directional risk as holding the underlying stock but have different margin, income, and dividend characteristics.
Example
An investor wants to replicate a long stock position in a company whose shares are hard to borrow. Instead of buying shares, they buy the $50 call and sell the $50 put with the same expiration, creating a synthetic long at $50. If the stock rises to $65, the call gains $15; if it falls to $35, the short put loses $15 — exactly mirroring stock ownership, minus dividends and with different margin requirements.
Source: CFA Institute — Put-Call Parity and Synthetic Positions