Synthetic Long Futures
A synthetic long futures position is achieved by selling a put and buying a call with the same strike price and expiration. It exhibits the same profit/loss profile as a long futures position.
Risk is unlimited if prices decline. Profits are unlimited if prices rally. The break-even in these examples are exactly where futures are trading.
Synthetic long futures positions combined with short futures positions are called reverse conversions or reversals. Reversals are arbitrage strategies that take advantage of temporary misalignments between call and put premiums with the same strike price and expiration date.
Position Premium Dollar Premium Delta Sell one $20 crude oil put $1.17 $1,170 +.48 Buy one $20 crude oil call $1.17 $1,170 +.52 Net debit 0 Net delta +1.00 Maximum risk Unlimited on the downside Maximum profit Unlimited on the upside Break-even futures price $20 Position Premium Dollar Premium Delta Sell one $260 gold put $6.70 $670 +.50 Buy one $260 gold call $6.70 $670 +.50 Net debit 0 Net delta +1.00 Maximum risk Unlimited on the downside Maximum profit Unlimited on the upside 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.
Education
- Futures Education
- Options Information
- Options Strategies
- Long At-the-Money Call
- Short Out-of-the-Money Call
- Covered Call
- Ratio Write
- Long Out-of-the-Money Call
- Long At-the-Money Put
- Short Out-of-the-Money Put
- Short Covered Put
- Bull Call Spread
- Bear Call Spread
- Bear Put Spread
- Bull Put Spread
- Long At-the-Money Straddle
- Long Strangle
- Short At-the-Money Straddle
- Short Strangle
- Call Ratio Backspread
- Put Ratio Backspread
- Synthetic Long Put
- Synthetic Long Call
- Synthetic Short Futures
- Synthetic Long Futures
- Fence
