A synthetic position replicates the risk-return characteristics of another instrument using combinations of different securities or derivatives. Synthetic positions enable access to exposures that might be difficult, expensive, or impossible to achieve directly. Common synthetics include synthetic stocks using options and synthetic bonds using swaps.

Synthetic instruments often provide cost advantages, regulatory benefits, or enhanced flexibility compared to direct positions. However, they may involve basis risk, complexity, and counterparty exposure. Understanding synthetic construction helps identify alternative ways to achieve desired exposures and arbitrage opportunities between synthetic and direct positions.

Real-world example: A trader creates synthetic long stock exposure by buying call options and selling put options with the same strike price and expiration, replicating stock ownership characteristics at potentially lower cost than buying shares directly.