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Introduction

Synthetic strategies are generally those that attempt to mimic other stock, futures, or options strategies and use other securities to create the new strategy. As such, we can re-create the underlying asset synthetically using only options. We can re-create long and short positions for straddles by using a combination of buying and selling stocks and options together. We can re-create the same risk profile shape as a Long Call or Long Put by combining other assets together. Often, these synthetic strategies come into being when you're looking to repair an existing strategy.

In this chapter, we'll cover the long and short synthetic straddles, which mimic those that we discussed in Chapter 4, “Volatility Strategies.” Whereas a long straddle involves buying an ATM call and put together, a Long Synthetic Straddle can be constructed using the stock with calls or the stock with puts. The advantage of understanding how these synthetic strategies are created is not only the flexibility it affords us as traders but also the adaptability to morph an existing position into something else simply by adding or taking away a leg of the trade. For example, if you're already long in a stock, but you think it may be about to reverse, you could buy puts to create either a Synthetic Call or double the number of puts, which would create a Long Put Synthetic Straddle.


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