A financial strategy that replicates the risk and reward profile of owning an underlying asset (a “long” position) by combining different derivative instruments, typically a long call option and a short put option with the same strike price and expiration date. In crypto institutional options trading, this construct allows for exposure to an asset’s price movement without directly holding the asset.
Mechanism
The synthetic long mechanism relies on the principle of put-call parity. By simultaneously buying a call option and selling a put option on the same crypto asset with identical strike prices and expiry, a trader creates a position that behaves almost identically to holding the underlying crypto asset itself, profiting from upward price movements and losing from downward movements.
Methodology
Traders employ this strategy when they anticipate an upward price movement for a crypto asset but prefer not to hold the asset directly, possibly due to capital efficiency, regulatory reasons, or to adjust risk exposure using derivatives. It involves precise simultaneous execution of the two option legs, often through RFQ crypto platforms or specialized institutional options desks, to minimize slippage and ensure the desired risk-reward profile is achieved.
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