Geldpress

Option traders are always looking for ways to reduce risk in their portfolio. One such method is through the use of synthetic positions. A synthetic position is a position that has nearly the same risk/reward and profit/loss curve as another. There is an equivalent synthetic position for all basic positions in a security.

Here is an example of a synthetic option position:

• Long Call Option synthetic is Long Stock + Long Put (married put)

A more complex example is the following synthetic equivalent:

• Option Collar syntehtic is the vertical call spread

When choosing between an option collar or a vertical spread, consider the following:

• Vertical spreads are cheaper on  a per share basis.  However, the question becomes what to do with the left over capital.  If the answer is to load up on many more vertical spreads, then you must understand the significantly increased risk from adding so much leverage.
• Tax considerations – a short term vertical spread will always result in short term tax consequences.  With an out of the money short term collar, the underlying shares can still be held for the long term.
• Adjustments – The adjustment techniques for stock option collars is completely different from that of vertical call spreads.

For more information on the tax considerations of stock options, please refer to the book below:

Capital Gains, Minimal Taxes 2009: The Essential Guide For Investors And Traders by Kaye Thomas

For more information on adjustment techniques of vertical spreads and stock option collars, the absolute best book on the market is shown below:

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour