What are the risks involved in buying a synthetic long (long call short put) and letting it expire compared to buying the underlying?

Question

As an EU resident, I am not allowed to purchase US-based ETFs. However, I am allowed to trade in options on such ETFs and exercise them.
One way of obtaining the stocks I would want to purchase is by purchasing a synthetic (long call + short put at same strike and expiry) and letting it expire.
Could you help me understand the risks and additional costs involved in doing this? I would like to compare them and their risks and costs to other alternatives: index futures, EU-based ETFs, CFDs (with my current broker), CFDs (with eToro)

Bob Baerker · Accepted Answer

If the underlying expired ITM or OTM. you'd be assigned.  The only possible way that the two options would expire worthless would be if the underlying closed exactly at the synthetic's strike at expiration and that's rare.
The additional costs involved in a synthetic long would be multiple bid/ask spreads and extra commissions if you're still paying them (US investors can trade with no commissions).
The only other issue is the comparison of the synthetic long's purchase price versus the current price of the stock.  For example, with TSLA at $630, the Feb 19th $630 synthetic long would cost 50 cents (B/A spreads are wide so working the combo should get you a better price).  Therefore, your cost basis of stock if assigned would be $630.50 .  If a stock pays a dividend prior to expiration, make sure to include it in your calculations.

eraserman · Answer

You would think that a synthetic long/short would replicate the underlying asset with the same payoff structure. However, due to bid/ask spreads, especially on less liquid products, the payoff will be inferior. In fact, if you put on a synthetic long and then shorted the stock, or vice versa, thereby having a totally delta hedged position, you would be automatically locking in a loss, simply because of the bid/ask spreads.
In addition, if you are assigned on any leg, you would have to have the resources on hand to cover that assignment. E.g. if you are assigned on the short put leg, you would need cash on hand, which you probably wouldn't be able to get by selling your calls, since the value of the calls would decrease. If you are assigned on the short call leg, you would need to have enough to buy the stock.

What are the risks involved in buying a synthetic long (long call short put) and letting it expire compared to buying the underlying?

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