Why Synthetics Are Important Synthetics are important for two reasons. The first is efficiency. With synthetics, one can consider the combination of options and stock that most efficiently (i.e., economically) creates the desired P&L profile. In consideration of trading commissions, you wouldn't buy a call and short a put if you wanted the risk profile of long stock. You would simply buy the stock. It's one trade versus two.
A common options strategy is the "covered call" strategy. The covered call is long 100 shares of stock and short 1 call option. Let's see the P&L profile of this strategy.
Enter 100 in the "Shares" field. Enter -1 in the "Calls" field. Click submit.
Being long 100 shares of stock and short 1 call is a synthetic short put (see the synthetics diagram on the main synthetics page). The covered call and the short put should therefore produce the same P&L profile. To prove it, enter -1 in the Puts field and delete the other two fields. Click submit and you'll see the P&L profile for the short put, which is identical to that of the covered call.
The short put is more cost-effective than the covered call because it's a single trade, while the covered call is two trades: 1) buy the stock and 2) short the call.
