Synthetic stock positions

Definition

A synthetic stock position replicates share exposure with options: long synthetic = long call + short put at the same strike and expiry (payoff identical to 100 shares, by put-call parity); short synthetic is the mirror. Synthetics matter twice — as a practical capital-efficiency tool, and as the conceptual bridge showing every options structure is stock plus volatility exposure rearranged.

How it works / structure

• Legs (long synthetic): +1 call K, −1 put K, same expiry; position delta ≈ +1.00 per contract pair × multiplier, independent of where K sits relative to spot (opt-put-call-parity — deviations are the box’s financing rate, strategy-box-spread).
• Entry cost: near zero net premium when K ≈ forward price; the position carries the forward’s financing/dividend differential rather than paying stock price upfront.
• Parameters (engine-executable): strike (usually near the money), expiry (the exposure’s term — synthetics EXPIRE, unlike shares), roll rule at expiry, margin model (acct-margin-rules — the short leg is margined), dividend handling (synthetics do not receive dividends; expected dividends are priced into the legs — event-dividends-ex-dates).
• Variants: split-strike synthetics (call and put strikes apart — that is strategy-collar minus the stock, also called a risk reversal), deep-ITM-call substitution (strategy-pmcc’s back leg).

When it applies

Capital-efficient directional exposure (margin on the short leg vs full stock cost), expressing direction where stock access is constrained, dividend/financing arbitrage accounting, and — most importantly for the platform — exposure ACCOUNTING: recognizing that a “hedged” book containing synthetics carries stock-like delta (port-exposure-netting).

Risk profile & failure modes

• It IS stock risk: full downside on the long synthetic (the short put is the downside), with margin calls instead of paid-up shares — leverage discipline (risk-fixed-fractional on notional, never on premium).
• Expiry cliff: shares persist, synthetics terminate; roll gaps and roll costs are part of any multi-cycle exposure.
• Dividend surprises: an unexpected special dividend transfers value from the call to the put side (ms-corporate-actions option-adjustment rules for specials; ordinary changes are unadjusted).
• Early assignment on the short leg (American style) can deliver stock early — the synthetic becomes real (ms-expiration-exercise-assignment).

Evidence & limits

The replication is model-free mathematics (put-call parity; OCC/Cboe references document the construction). Empirical content is in the deviations — financing rates and hard-to-borrow signals embedded in synthetic pricing (negative synthetic-implied rates flag borrow stress, ms-short-locate-borrow). No return claims: a synthetic earns what the stock earns, minus carry.

Falsifiable-thesis examples

Illustrations only, not signals:

• “The 6-month synthetic on X (K at-the-forward) will track X’s total return within carry ± 50bp over its life” — falsified by the replication accounting.
• “X’s synthetic-implied borrow rate will stay under 2% annualized this quarter (no borrow stress)” — falsified by the implied-rate series.

Cross-references

• The identity: opt-put-call-parity; the financing residual: strategy-box-spread
• Structures built on synthetics: strategy-pmcc, strategy-collar (risk reversal + stock)
• Exposure honesty: port-exposure-netting, greek-delta
• Mechanics: acct-margin-rules, ms-expiration-exercise-assignment, event-dividends-ex-dates