resources

In Our Words

"I bring dedication, integrity and 13+ years of experience to the table when assisting my clients to achieve their goals."

Burton Schlichter
Futures & Options Broker

Free Offers & Trials

Basic Training for Futrues Traders Guide

Basic Training for Futures Traders

View all free trials & offers

4. Synthetic Short Futures (Split-Strike)

MENU - Futures Strategy Guide

Contents Courtesy of CME.com

synthetic short futures

Scenario:

This trader feels that Eurodollar prices are going to drop (interest rates to rise).  He has no opinion on volatility.  He considers a straight short futures, but decides that there is a slight chance that EuroDollar futures will rise a little.  He therefore decides to try a split-strike synthetic short futures position.

Specifics:
Underlying Futures Contract: March Eurodollar futures  
Futures Price Level: 92.70  
Days to Futures Expiration: 59  
Days to Options Expiration: 40  
Option Implied Volatility: 23.2%  
Option Position: Long 1 Mar 92.50 Put - 0.14 ($ 350)
  Short 1 Mar 92.75 Call + 0.20 ($ 500)
    + 0.06 ($ 150)
At Expiration:
Breakeven: 92.81 (92.75 strike + 0.06 credit)
Loss Risk: Unlimited; losses mount above 92.81 breakeven.
Potential Gain: Unlimited; profits increase as futures fall past 92.50 strike.

Things to Watch:

Implied volatility changing normally has no effect on this strategy.  Therefore, if the trader has an opinion on volatility, he may find another strategy with a better risk/reward profile.  Watch this position carefully;just like a short futures, this position has unlimited risk.  Check the next page for follow-up strategies.

Follow-up Trading Strategies

synthetic short futures: follow-up trading strategies

Enlarge

MENU - Futures Strategy Guide

Contents Courtesy of CME.com