I'm looking for some scientific papers to get a better grasp of synthetic options mainly the valuation, eventual time decay etc.. I've looked in my university library and only but I only found obscure references.

kind regards

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    $\begingroup$ Can you please clarify what you mean by "synthetic options". A description or an example, etc. $\endgroup$ – Alex C Apr 1 at 20:10
  • $\begingroup$ Hi Alex sorry about that I guess they are refered to as Stock constructions. For example buying 1 At the money call and selling 1 ATM put would simuate the same diagram as going long on a stock. $\endgroup$ – J.W.D Apr 1 at 20:26
  • $\begingroup$ OK, "synthetic long stock position" for example. They are very straightforward to analyze and I do not think you will find many papers about it. They will be briefly mentioned in books about option combinations. As you said "buy call, sell put (with same strike)" is equivalent to a long stock position, with leverage. I am not sure there is a lot more to say about it. $\endgroup$ – Alex C Apr 1 at 20:30
  • $\begingroup$ Thank you very much Alex, It was recommended to me by a professional trader to look at "Dynamic hedging" by Nicholas Taleb who goes in depth on the matter. $\endgroup$ – J.W.D Apr 2 at 16:28
  • $\begingroup$ Good luck, that book is very advanced and the author is not particularly known for explaining himself clearly. $\endgroup$ – Alex C Apr 2 at 18:49

As mentioned in the comments, you will most likely not find much literature on simple synthetic positions such as the synthetic long stock. This is simply a way to obtain a highly leveraged version of the same risk profile as a long stock position - hence, analyzing the risk profile is redundant. However, there are a few papers on taking more advanced synthetic positions to replicate complicated options structures. See for example:

Tilley, James A., and Gary D. Latainer. "A Synthetic Option Framework for Asset Allocation." Financial Analysts Journal 41, no. 3 (1985): 32-43. http://www.jstor.org/stable/4478840.

Valuation is is in general completely trivial, since the value of a synthetic position is simply the sum of the values of its components.


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