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3. Synthetic Long Futures (Split Strike)
Contents Courtesy of CME.com

Scenario:
Normally a trader enters into this position only as a follow-up strategy. Suppose the trader had a short strangle that he wanted to convert to a long futures. He can buy 2 calls (one liquidates the original short call). This nearly creates a synthetic long futures (long call, short put); however, it does so at different strike prices. The only difference in the risk/reward profile is the flat area between strikes-where little is gained or lost (depending upon the premiums and the exact strikes chosen).
| Underlying Futures Contract: | September Euro FX | |
| Futures Price Level: | 1.0100 | |
| Days to Futures Expiration: | 65 | |
| Days to Options Expiration: | 55 | |
| Option Implied Volatility: | 14.9% | |
| Option Position: | Long 1 Mar .6450 Call | - .0020 ($200) |
| Short 1 Mar .6350 Put | + .0019 ($190) | |
| - .0001 ($ 10) |
| Breakeven: | .6451 (.6450 strike + 0.0001 debit) | |
| Loss Risk: | Unlimited; losses mount as futures fall past .6350 strike. | |
| Potential Gain: | Unlimited; profits increase as futures rise past .6451 breakeven. | |
Things to Watch:
This position is not normally affected by changes in implied volatility. It is nearly the same as a long futures position except for the flat area between strikes. The flat area below the current futures price allows for some downside movement without loss. However, the trader gives away a little upside potential. Check the next page for follow-up strategies.
Follow-up Trading Strategies
Contents Courtesy of CME.com



