What Is a “Synthetic Long” Position Created Using Delta and the Underlying?
A synthetic long position replicates the payoff of a long position in the underlying asset without actually owning it. It can be created by buying an At-the-Money (ATM) call option and simultaneously selling an ATM put option with the same strike and expiration.
Alternatively, a deep ITM call option with a Delta near 1 acts as a synthetic long position due to its dollar-for-dollar movement with the underlying.
Glossar
Long Position
Definition ⎊ A long position represents the purchase of a financial instrument, such as a cryptocurrency, stock, or derivative contract, with the expectation that its price will increase.
Synthetic Long
Construction ⎊ A synthetic long position replicates the payoff profile of owning an underlying asset without directly purchasing it, frequently employed in cryptocurrency markets where direct ownership may be restricted or inefficient.
Atm Put Option
Option ⎊ An ATM put option, within cryptocurrency derivatives, represents a contract granting the holder the right, but not the obligation, to sell an underlying cryptocurrency at a predetermined strike price on or before a specified expiration date.
Synthetic Long Position
Construction ⎊ A Synthetic Long Position is a derivative structure designed to replicate the payoff profile of holding the underlying cryptocurrency asset without actually owning it, typically achieved by combining a long call option and a short put option at the same strike and expiration.
Synthetic Short Position
Construction ⎊ A synthetic short position in cryptocurrency derivatives replicates the payoff profile of a traditional short sale without directly owning the underlying asset.