by Tom Nunamaker on April 3, 2012

Quiz Answer

How did you do taking the quiz on Option Synthetics. In case you want a refresher, heres an article I wrote about them that is a good summary: What everybody ought to know about Option Synthetics. We can use an easy equation to remember the synthetic relationships:

6. Short Stock = Short Call + Long Put (-U = -C + P)

Armed with this information, lets go through the quiz:

1. How would you create a synthetic SHORT CALL?

Thats #2 on our summary: Short Stock + Short Put

2. How would you create synthetic LONG STOCK?

Thats #5 on our summary: Long Call + Short Put

3. How would you create a synthetic LONG PUT?

Thats #3 on our summary: Long Call + Short Stock

4. How would you hedge an out-of-the-money SHORT CALL with a synthetic position?

To completely hedge the position, use a synthetic LONG CALL at the same strike as your SHORT CALL.

Buy LONG STOCK and a LONG PUT at the same strike as your SHORT CALL.

You now have zero risk and are perfectly hedged.

5. If your underlying is near your upside expiration on a butterfly trade, how would you reduce your delta risk with a synthetic position?

If you are near the upside expiration of a butterfly, you have negative Deltas.

New need to crease your deltas. Positive delta synthetics are #1, #4 and #5 on our summary list above. Any of them should give you more positive delta. If you need a fine adjustment, use #1 or #4 as #5 (Long Stock) is +100 deltas, which might be too much, depending on your butterfly size.

6. How can you completely neutralize a 100/110 call credit spread with puts?

Create a box spread. The 100/110 call credit spread is -1 100C and +1 110C. If you add +1 100P and -1 110P you would have synthetic Short stock at 100 and synthetic Long stock at 110. This position has zero risk.

7. You are long a futures contract at $100. The contract is now at $125. How can you lock in the $25 profit without selling the futures contract over the weekend with a synthetic option position?

To lock in the $25 profit, you just need to add a synthetic short future with futures options:

-1 125C and +1 125P should give you a synthetic short future contract, which will neutralize your long future.

I hope you enjoyed the quiz. Its good to know these relationships and practice from time-to-time with a quiz like this!