Synthetic vs. call or put

As retail traders, it would be difficult to exploit price differences between the synthetic calls / puts versus actual calls / puts. The bid / ask spread would generally wipe out any hope of arb'ing the differences profitably.

However, there may be situations where it may be advantageous to exit your position synthetically, rather than exiting directly.

For instance, let's say you want to exit a deep ITM call option that has a substantial profit. Since the call option is deep ITM, the bid/ask spread may be quite wide. If you were to close the call option, you may lose a bit of profit on the bid / ask spread.

So instead of selling the call option, you can synthetically close the call option by shorting the stock directly. Since the stock would likely have a tighter bid / ask spread, you would give up less profit than if you were to sell your deep ITM call option.


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surfer25 said:
Can someone please tell me under which circumstances a synthetic would have an advantage over an outright call or put?
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You might not outright substitute one for the other, but you can think of synthetics being helpful when you want to change the nature of the original position. For instance, if you're long stock and overwrite with a single short OTM call, you've expressed a specific financial opinion. If your opinion changes with time such that now you'd like a short straddle, instead of off-ing the stock and shorting a put, you can simply add another short call at the same strike, and now you've got your short straddle. Synthetically.
 
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