How Is Synthetic Long or Short Position Created Using Options for Arbitrage?

A synthetic position mimics the payoff of a direct asset position using a combination of options. A synthetic long position can be created by buying a call option and selling a put option at the same strike price and expiration.

A synthetic short is the opposite. Arbitrage arises if the cost of the synthetic position does not equal the spot price, violating put-call parity.

This allows for risk-free profit by trading the mispriced combination.