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Options Trading by Ann Logue

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CHAPTER12

Synthetic Securities

In This Chapter

  • Making custom combinations
  • Different ways to earn the same pay
  • The costs and risks of working with synthetics
  • Strategies with synthetics

Options are contracts based on prices. They aren’t securities on an underlying item itself. They are based on the value of the underlying asset. If you have access to the value of the asset, do you need to own the underlying asset, too? This is the question behind options and other derivatives.

If we reduce assets to their payouts, then we can approach them in a different way. We can find ways to replicate the value, possibly at a lower cost.

A synthetic security ...

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