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Home / Education / Futures & Options Strategy Guide / Short Synthetic Futures

Short Synthetic Futures

Overview

Pattern evolution:

Short Synthetic Futures

Learn 21 futures and options trading strategies in this complimentary,  easy-to-read guide. Download Now >>

When to use: When you are bearish on the market and uncertain about volatility. You will not be affected by volatility changing. However, if you have an opinion on volatility and that opinion turns out to be correct, one of the other strategies may have greater profit potential and/or less risk. May be traded into from initial short call or long put position to create a stronger bearish position.

Profit characteristics: Profit increases as market falls. Profit is based strictly on the difference between the synthetic entry price and the exit price.

Loss characteristics:
Loss increases as market rises. Loss is based strictly on the difference between the synthetic entry price and the exit price.

Decay characteristics: None.

CATEGORY: Directional
Long put A, short call A

Example

Short Synthetic Futures Example

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.

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Additional Futures & Options Strategies

  • How to Use This Guide
  • Long Futures
  • Long Synthetic Futures
  • Long Risk Reversal
  • Short Risk Reversal
  • Long Call
  • Short Call
  • Long Put
  • Short Put
  • Bull Spread
  • Bear Spread
  • Long Butterfly
  • Short Butterfly
  • Long Iron Butterfly
  • Short Iron Butterfly
  • Long Straddle
  • Short Straddle
  • Long Strangle
  • Short Strangle
  • Ratio Call Spread
  • Ratio Put Spread
  • Ratio Call Backspread
  • Ratio Put Backspread
  • Box or Conversion

Contents Courtesy of CME Group.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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