"I let my 24 years of "lessons learned" to act as an informational storehouse for my clients. We can then sort through the trading methods and risk management of the client to adapt to the current market conditions."
– Leslie Burton
Futures & Options Broker
4. Synthetic Short Futures (Split-Strike)
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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
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