Synthetic Short Futures
A synthetic short futures position is achieved by selling a call and buying a put with the same strike price and expiration. It exhibits the same profit/loss profile as a short futures position. Risk is unlimited if prices rally. Profits are unlimited if prices decline.
Synthetic short futures positions combined with long futures positions are call conversions. Conversions are arbitrage strategies that take advantage of temporary market misalignments between call and put premiums with the same strike price and expiration date.
The synthetic short position is the breakeven point determined by the sum of the at-the-money futures and the net premium received or paid.
Position Premium Dollar Premium Delta Sell one $20 crude oil call $1.17 -.52 Buy one $20 crude oil put - Net debit - Net delta $1.17 0 $1,170 $1,170 -.48 -1.00 Maximum risk Unlimited on the upside Maximum profit Unlimited on the downside Break-even futures price $20 Position Premium Dollar Premium Delta Sell one $260 gold call $6.70 $670 -.50 Buy one $260 gold put - Net debit - Net delta $6.70 0 $670 -.50 -1.00 Maximum risk Unlimited on the upside Maximum profit Unlimited on the downside Break-even futures price $260
THERE IS A RISK OF LOSS IN FUTURES TRADING AND IS NOT SUITABLE FOR
ALL INVESTORS. ONLY RISK CAPITAL SHOULD BE USED WHEN TRADING FUTURES.
Copyright 2008 Capitol Commodity Services, Inc. All Rights Reserved.
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