Synthetic Futures

A synthetic position is a trading strategy that replicates the characteristics of another position. In the context of futures, a synthetic futures position involves combining call and put options to mimic the payoff of a futures contract. This allows investors to gain exposure to price movements in the underlying asset without directly trading futures. For example, an investor can create a synthetic long futures position by buying a call option and selling a put option. This strategy profits from upward price movements. About lesson. A synthetic position is a trading strategy where an investor creates an artificial position that mimics the characteristics of another position. In the context of futures, a synthetic futures position might involve combining options, call and put options, to replicate the payoff profile of a futures contract. This can be done to gain exposure to price movements in the underlying asset without directly trading the futures contract. For example, if an investor believes that the price of a stock will rise, they might create a synthetic long futures position by buying a call option, which benefits from upward price movements, and selling a put option, which benefits from stable or rising prices. This combination can create a risk and return profile similar to holding a long futures contract. Buying Synthetic Futures When we talk about buying synthetic futures, we are usually referring to a trading strategy that mimics the payoff of a traditional long futures position through the use of options. This strategy is known as a synthetic long futures position. It involves combining a long call option with a short put option, both having the same strike price and expiration date. Here are the basic components of a synthetic long futures position. Long Call Option The investor buys a call option, which gives them the right, but not the obligation, to buy the underlying asset at a specified price, strike price, before or at the expiration date. The long call benefits from upward price movements in the underlying asset. Short Put Option Simultaneously, the investor sells a put option with the same strike price and expiration date as the long call. The short put obligates the investor to buy the underlying asset at the strike price if the option is exercised by the option holder. The short put benefits from stable or rising prices in the underlying asset. By combining these two options, the investor creates a position that behaves similarly to owning a long futures contract. Here's why. Profit Potential The synthetic long futures position profits when the price of the underlying asset rises. The long call gains value with upward price