Synthetic Futures Contract

What is a Synthetic Futures Contract?

A synthetic futures contract utilizes put and call options with the equivalent strike price and expiration date to mimic a traditional futures contract.

Understanding Synthetic Futures Contracts

The purpose of a synthetic futures contract, likewise called a synthetic forward contract, is to emulate a normal futures contract. The investor will typically pay a net option premium while executing a synthetic futures contract as the premium paid is, generally, not offset by the premium collected.

There are two types of traditional futures contracts that can be imitated by synthetic futures contracts:

1. Long futures position: Buy calls and sell puts with the indistinguishable strike price and expiration date.
2. Short futures position: Buy puts and sell calls with the indistinguishable strike price and expiration date.

Synthetic futures contracts can assist investors with decreasing their risk, in spite of the fact that likewise with trading futures outright, investors actually face the possibility of huge losses in the event that they don't execute legitimate risk management strategies. One more major advantage of a synthetic futures contract is just a "future" position can be kept up with without similar types of requirements for counterparties, including the risk that one of the gatherings will renege on the agreement.

Synthetic Long Futures Contract

To make a synthetic long futures contract on a stock, buy a call with a $60 strike price and, simultaneously, sell a put with a $60 strike price and same expiration date. At expiration, the investor will buy the underlying asset by paying the strike price, regardless of what direction the market moves before that time.

• Assuming the stock price is over the strike price on the expiration date, the investor, who claims the call, will need to exercise that option and pay the strike price to buy the stock.
• Assuming the stock price at expiration is below the strike price, the owner of the put that was sold will need to exercise that option. The outcome is the investor will likewise buy the stock by paying the strike price.
• Regardless, the investor winds up buying the stock at the strike price, which was locked in when the synthetic futures contract was laid out.

Keep at the top of the priority list that there could be a cost for this guarantee. Everything relies upon the strike price and expiration date picked. Put and call options with a similar strike and expiration might be priced in an unexpected way, contingent upon how far in or out of the money the strike prices might be. Typically, the boundaries picked end up with the call premium being marginally higher than the put premium, making a net debit in the account toward the beginning.

Features

• A major advantage of a synthetic futures contract is simply a "future" position can be kept up with without similar types of requirements for counterparties, including the risk that one of the gatherings will renege on the agreement.
• A synthetic futures contract utilizes put and call options with a similar strike price and expiration date to reenact a traditional futures contract.
• Synthetic futures contracts can assist investors with lessening their risk.