Why Synthetics Are Important Perhaps more important than efficiency is the fact that synthetics open your eyes to powerful trading alternatives.
First, create the P&L profile of a synthetic long call by entering 100 in the "Shares" field and 1 in the Puts field. Click "Submit". Now, ask yourself this: If a synthetic long call is 100 shares of stock and 1 long put, then what is 50 shares of stock and 1 long put? Enter these values and you will see the P&L profile of a long synthetic straddle (a natural straddle would be 1 long call and 1 long put.)
Now enter 0 shares, 0 calls, 1 put. Increase the number of shares in increments of 25 and observe that the P&L profile transitions from bearish to bullish. You can create an investment that matches your market outlook and risk tolerance precisely. Indeed, you can control your risk in single-share increments.
Try these values:
100 shares, 0 calls, 1 put / 75 shares, 0 calls, 1 put / 50 shares, 0 calls, 1 put
-100 shares, 0 calls, -1 put / -50 shares, 0 calls, -1 put / -25 shares, 0 calls, -1 put
0 shares, 1 call, -1 puts (synthetic long stock)
-100 shares, 1 call, -1 puts (short stock & synthetic long stock is a "lock"; one offsets other)
