Hi Shoppers,

A major key to trading options is understanding how the calls, puts and stock work together.

This is called the synthetics because you can synthetically create any of the three using the other two.

This also helps you refrain from pattern day trading as you can synthetically close a long option without actually selling that option.

Here they are and you want to know these inside and out:

• Long stock = long call + short put
• Short stock = short call + long put 
• Long put = long call + short stock

• Short put = short call + long stock
• Long call = long put + long stock
• Short call = short put + short stock 

So to close a winning call in the S&P 500 Mini SPX Options Index (Ticker: XSP) you would create a box.

A box is a call vertical and a put vertical with the same two strikes.

The value of a box is the difference between the two strikes.

For example the 495/500 box is worth $5.00. 

To synthetically collect your gain on your long call you first sell a small out of the money call creating your call vertical.

In our example that gives you 

Long the 495 calls and short the 500 calls.

To complete your box and collect your money you will buy the 500/495 put vertical.

This gives you the two positions in each strike:

Long the 495 call and short the 495 put = long stock

and

Short the 500 call and long the 500 put = short stock

The two positions act like long stock and short stock therefore negating each other.

This is a neutral position and locks in your gain on the call because the box is worth $5.00.

As you can see the options are properly priced: