synthetic position

Definition

A combination of financial instruments engineered to replicate the risk/return profile of another investment without actually owning it. It's like creating a financial doppelgänger using derivatives, which surely can't go wrong.

Example Usage

The trader created a synthetic long position using options to avoid triggering the wash sale rule.

Origin

Options trading terminology based on put-call parity relationships discovered in the 1960s

Fun Fact

Synthetic CDOs, which were synthetic positions on synthetic positions, played a starring role in the 2008 financial crisis by amplifying losses exponentially.

Source: Derivatives trading and options market terminology

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