Synthetic Stock Definition
Synthetic stock is created when a holder of a call and put option simulates the stock when that holder buys and sells the options accordingly. Without participating in the market the holder can stand to make a gain. Then, they can invest in the stock as long as the expiration has not occurred for the options.
Synthetic Stock Explained
Synthetic Stock can be created in various different ways but the most common ways involve having a long or short stance on a put option, and the same for a call option. A synthetic long stock is where an investor will take a long position on the call option while taking a short position on the put option. The other stance is known as a synthetic short stock. That involves the investor taking a long position on the put option and a short stance on the call option.
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