Synthetic Stock, the Risk Alternative for Option Traders

Michael C. Thomsett

Market risk. That is the single biggest concern every trader has when thinking about buying stock. If you put thousands of dollars into buying shares, you risk losing a good part of it if and when the market goes down.

You cannot completely eliminate market risk. However, you can use options in creating synthetic positions to vastly reduce that risk. By opening options, you can create a position that will gain or lose in virtual duplication of how stock will act, but for only a fraction of the overall cost. In other words, for only a few dollars, you can realize price movement just as if you owned 100 shares of the underlying stock. This means you risk much less, not ...