Explain the Concept of “Synthetic Options” and How They Are Constructed Using the Underlying Asset and Other Derivatives

A synthetic option is a portfolio of other financial instruments (typically the underlying asset and a derivative like a future or another option) that replicates the payoff profile of a standard option. For example, a synthetic long call can be created by buying the underlying asset and buying a put option.

Synthetic positions are used for arbitrage, to manage risk, or when a specific option is unavailable or illiquiquid.