synthetic long futures
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 Category: synthetic futures and option strategies
 Published on Thursday, 18 February 2010 19:45
synthetic long futures
the synthetic long futures is an options strategy used to simulate the payoff of a long futures position. it is entered by buying atthemoney call options and selling an equal number of atthemoney put options of the same underlying futures and expiration month.
synthetic long futures composition

buy 1 at the money call

buy 1 at the money put

this is an unlimited profit, unlimited risk options position that can be created to hedge a short futures position, often as a means to profit from an arbitrage opportunity.
the synthetic long futures strategy is also used when the futures trader is bullish on the underlying futures but seeks an alternative to purchasing the futures outright.
unlimited profit potential
similar to a long futures position, there is no maximum profit for the synthetic long futures. the futures options trader stands to profit as long as the underlying futures price goes up.
the formula for calculating profit is given below:

maximum profit = unlimited

profit achieved when price of underlying > strike price of long call + premium paid +commissions & fees

profit = price of underling  strike price of long call  premium paid  commissions & fees
unlimited risk
like the long futures position, heavy losses can occur for the synthetic long futures if the underlying futures price falls dramatically.
the formula for calculating loss is given below:

maximum loss = unlimited

loss occurs when price of underlying < strike price of short put + premium paid + commissions & fees

loss = strike price of short put  price of underlying + net premium paid + commissions & fees
breakeven points
the underlier price at which breakeven is achieved for the synthetic long futures position can be calculated using the following formula.
 breakeven point = strike price of long call + premium paid + commissions & fees
example
suppose june crude oil futures is trading at $40 and each futures contract covers 1000 barrels of crude oil. a futures options trader enters a synthetic long futures position by selling a jun crude oil 40 put for $5100 and buying a jun crude oil 40 call for $4800. the net credit received upon entering the trade is $300.
scenario #1: june crude oil futures rises to $50
if june crude oil futures rallies and is trading at $50 on option expiration date, the short jun 40 put will expire worthless but the long jun 40 call expires in the money and has an intrinsic value of $10000. including the initial credit of $300, the trader's profit comes to $10300. comparatively, this is very close to the profit of $10000 for a long futures position.
scenario #2: june crude oil futures drops to $30
if june crude oil futures is instead trading at $30 on option expiration date, then the long jun 40 call will expire worthless while the short jun 40 put will expire in the money and be worth $10000. buying back this short put will require $10000 and subtracting the initial $300 credit taken when entering the trade, the trader's loss comes to $9700. this amount closely approximates the $10000 loss of the corresponding long futures position.
upfront investment
some novice futures traders mistakenly believe that the synthetic long futures strategy requires very little upfront investment. they assumed that by trading options instead of futures, they can avoid posting the margin. unfortunately, the short put position is subjected to the same margin requirements as a short futures position. hence, the synthetic long futures position requires more or less the same upfront investment as a regular long futures position.
Non Synthetic Positions

Long Call Butterfly

Long Futures Position

Short Futures Position

Long Call

Short Call

Bear Spread (call & put)

Bull Spread (call & put)

Long Put

Short Put

Long Straddle

Short Straddle

Long Strangle

Short Strangle

Call Ratio Spread

Put Ratio Spread

Call

Call Ratio Backspread

Put Ratio Backspread

Long Put Butterfly

Short Butterfly

Box Or Conversion/Reversal
Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future results.
A DIVISION OF FOURTH RIGHT COMMUNICATIONS, L.L.C.
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