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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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