A Synthetic Stock position replicates the economic exposure of owning a traditional equity share through a combination of derivatives, without actually holding the underlying stock. In crypto, this concept extends to creating synthetic exposure to a digital asset or a traditional stock using crypto-native derivatives or decentralized finance (DeFi) protocols.
Mechanism
The operational construction of a synthetic stock typically involves pairing a long call option with a short put option, both having the same strike price and expiration date, to mirror the payoff profile of the underlying asset. In DeFi, this might involve collateralizing assets in a protocol that issues synthetic tokens, or using perpetual futures. The system dynamically adjusts the derivative positions to maintain the desired delta exposure.
Methodology
Traders utilize synthetic stock positions to gain exposure to an asset with less capital outlay, exploit pricing discrepancies between derivatives and spot markets, or bypass direct ownership restrictions. This strategic approach offers leverage and capital efficiency while managing market risk through defined derivative structures. It provides a versatile tool for both speculation and hedging in regulated or decentralized financial environments.
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