Synthetic Long Futures (Split Strikes) Explained – Futures Options

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

Contents

Synthetic Long Futures (Split Strikes)

The synthetic long futures (split strikes) is a less aggressive version of the synthetic long futures strategy.

The synthetic long futures (split strikes) position is created by buying slightly out-of-the-money calls and selling an equal number of slightly out-of-the-money puts of the same underlying futures and expiration month.

Synthetic Long Futures (Split Strikes) Construction
Buy 1 OTM Call
Sell 1 OTM Put

The split strike version of the synthetic long futures strategy offers some downside protection. If the trader’s outlook is wrong and the underlying futures price falls slightly, he will not suffer any loss. On the flip side, a stronger upside move is needed to produce a profit.

Profits and losses with a split strike strategy are also not as heavy as a corresponding long futures position as the strategist has traded some potential profits for downside protection.

Unlimited Profit Potential

Similar to a long futures position, there is no maximum profit for the synthetic long futures (split strikes) strategy. The options trader stands to profit as long as the underlying futures price goes up.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Price of Underlying > Strike Price of Long Call – Net Premium Received
  • Profit = Price of Underlying – Strike Price of Long Call + Net Premium Received

Unlimited Risk

Like the long futures position, heavy losses can occur for the synthetic long futures (split strikes) if the underlying futures price falls sharply.

Often, a credit is received when establishing this position. Hence, even if the underlying futures price remains unchanged on expiration date, there will still be a profit equal to the initial credit received.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying

Breakeven Point(s)

The underlier price at which break-even is achieved for the synthetic long futures (split strikes) position can be calculated using the following formula.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

  • Breakeven Point = Strike Price of Short Put – Net Premium Received OR Strike Price of Long Call + Net Premium Paid

Example

Suppose June Crude Oil futures is trading at $40 and each contract covers 1000 barrels. A trader creates a split-strikes synthetic long futures position by selling a JUN 35 put for $2200 and buying a JUN 45 call for $2000. The net credit taken to enter the trade is $200.

Scenario #1: June Crude Oil futures rise moderately to $45

If June Crude Oil futures rallies to $45 on option expiration date, both the short JUN 35 put and the long JUN 45 call will expire worthless and the trader gets to keep the initial credit of $200 as profit.

Scenario #2: June Crude Oil futures rallies explosively to $60

If June Crude Oil futures skyrockets to $60 on option expiration date, the short JUN 35 put will expire worthless but the long JUN 45 call will expire in the money and has an intrinsic value of $15000. Including the initial credit of $200, the options trader’s profit comes to $15200. Comparatively, a corresponding long futures position would have achieved a higher profit of $20000.

Scenario #3: June Crude Oil futures crashes to $20

If the price of June Crude Oil futures has instead nosedived to $20, the long JUN 45 call will expire worthless while the short JUN 35 put will expire in the money and be worth $15000. Buying back this short put will require $15000 and subtracting the initial $200 credit received when entering the trade, the trader’s loss comes to $14800. A heavier loss of $20000 loss would have been suffered by a corresponding long futures position.

Synthetic Long Futures

There is a more aggressive version of this strategy where both the call and put options involved are at-the-money. While a smaller upside movement of the underlying futures price is required to accrue large profits, this alternative strategy provides less margin for error.

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Synthetic Long Futures

The synthetic long futures is an options strategy used to simulate the payoff of a long futures position. It is entered by buying at-the-money call options and selling an equal number of at-the-money put options of the same underlying futures and expiration month.

Synthetic Long Futures Construction
Buy 1 ATM Call
Sell 1 ATM Put

This is an unlimited profit, unlimited risk options position that can be created to hedge a short futures position, often as a means to profit from an arbitrage opportunity.

The synthetic long futures strategy is also used when the futures trader is bullish on the underlying futures but seeks an alternative to purchasing the futures outright.

Unlimited Profit Potential

Similar to a long futures position, there is no maximum profit for the synthetic long futures. The futures options trader stands to profit as long as the underlying futures price goes up.

The formula for calculating profit is given below:

  • Maximum Profit = Unlimited
  • Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid
  • Profit = Price of Underlying – Strike Price of Long Call – Net Premium Paid

Unlimited Risk

Like the long futures position, heavy losses can occur for the synthetic long futures if the underlying futures price falls dramatically.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying

Breakeven Point(s)

The underlier price at which break-even is achieved for the synthetic long futures position can be calculated using the following formula.

  • Breakeven Point = Strike Price of Long Call + Net Premium Paid

Example

Suppose June Crude Oil futures is trading at $40 and each futures contract covers 1000 barrels of Crude Oil. A futures options trader enters a synthetic long futures position by selling a JUN Crude Oil 40 put for $5100 and buying a JUN Crude Oil 40 call for $4800. The net credit received upon entering the trade is $300.

Scenario #1: June Crude Oil futures rises to $50

If June Crude Oil futures rallies and is trading at $50 on option expiration date, the short JUN 40 put will expire worthless but the long JUN 40 call expires in the money and has an intrinsic value of $10000. Including the initial credit of $300, the trader’s profit comes to $10300. Comparatively, this is very close to the profit of $10000 for a long futures position.

Scenario #2: June Crude Oil futures drops to $30

If June Crude Oil futures is instead trading at $30 on option expiration date, then the long JUN 40 call will expire worthless while the short JUN 40 put will expire in the money and be worth $10000. Buying back this short put will require $10000 and subtracting the initial $300 credit taken when entering the trade, the trader’s loss comes to $9700. This amount closely approximates the $10000 loss of the corresponding long futures position.

Upfront Investment

Some novice futures traders mistakenly believe that the synthetic long futures strategy requires very little upfront investment. They assumed that by trading options instead of futures, they can avoid posting the margin. Unfortunately, the short put position is subjected to the same margin requirements as a short futures position. Hence, the synthetic long futures position requires more or less the same upfront investment as a regular long futures position.

Synthetic Long Futures (Split Strikes)

There is a less aggressive version of this strategy where both the call and put options involved are out-of-the-money. While a larger upside movement of the underlying futures price is required to accrue large profits, this alternative strategy does provide more room for error.

Synthetic Short Futures

The companion strategy to the synthetic long futures is the synthetic short futures.

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Day trading currencies

The best trading software for options reviews

Futures and options explained,penny stock trade online,stockbroker’s scarf – Downloads 2020

Volatility Skew Definition:Using the Black Scholes option pricing model, we can compute the volatility of the underlying by plugging in the market prices for the options. The volatility smile skew pattern is commonly seen in near-term equity options and options in the forex market.
Volatility smiles tell us that demand is greater for options that are in-the-money or out-of-the-money.
In the reverse skew pattern, the IV for options at the lower strikes are higher than the IV at higher strikes.
The popular explanation for the manifestation of the reverse volatility skew is that investors are generally worried about market crashes and buy puts for protection.
Another possible explanation is that in-the-money calls have become popular alternatives to outright stock purchases as they offer leverage and hence increased ROI. Single stock future ssf, was conducted using intraday bid ask quotes of single stock dividend futures and education on index futures has bought ten single stock futures contracts between and, options on a standard owners fifth.
Launches new york wakes up losses as single stock futures options exchange has received substantial attention.
The synthetic short futures (split strikes) is a less aggressive version of the synthetic short futures. The split strike version of the synthetic short futures strategy offers some upside protection. Profits and losses with a split strike strategy are also not as heavy as a corresponding short futures position as the strategist has traded some potential profits for upside protection. If June Crude Oil futures drops to $35 on expiration date, both the long JUN 35 put and the short JUN 45 call will expire worthless and the trader keeps the initial credit of $200 as profit.
Buying back this long call will require $15000 and subtracting the initial $200 credit received when entering the trade, the trader’s net loss comes to $14800. Every option trader, whether novice or experienced, is aware about the various structures and combinations which can be created by using multiple options.

The Butterfly Options position can be constructed in many ways depending upon the preferences of the option trader using either call or put options.
The name “Butterfly Options” comes because the final payoff structure formed in the Butterfly Options Position resembles a butterfly.
Here is how the Long Butterfly (RED colored Graph) and Short Butterfly (YELLOW colored graph) look. If you look closely, then the RED graph resembles the butterfly – center pyramid indicating the body of the butterfly and the horizontal lines on either sides indicating the wings. Similarly, the YELLOW graph resembles the inverted butterfly – again the center inverted pyramid resembling the body of butterfly and horizontal lines on either sides indicating the wings. Butterfly options can be constructed by taking multiple option positions – some short and some long (as we’ll see in the following details). They offer limited profit limited loss potential, so considered safe bets in options trading. Butterfly option positions can be constructed by using either all call options (some long and some short) or by using all put options (some long and some short). Before an option trader decides to use calls or puts, he needs to first decide which butterfly (long or short) he wants to trade on. Once the option trader decides which butterfly he wants to trade (long or short), he can then select the call butterfly or put butterfly. Theoretically, for options with the same expiration date, we expect the implied volatility to be the same regardless of which strike price we use.
The reverse skew pattern typically appears for longer term equity options and index options. The reverse skew pattern suggests that in-the-money calls and out-of-the-money puts are more expensive compared to out-of-the-money calls and in-the-money puts. One piece of evidence supporting this argument is the fact that the reverse skew did not show up for equity options until after the Crash of 1987.

This leads to greater demands for in-the-money calls and therefore increased IV at the lower strikes. In the forward skew pattern, the IV for options at the lower strikes are lower than the IV at higher strikes.
An asx spi index comprises more quickly than real estate or sell abc shares on volatility than real estate or all stocks that are explained press release. If the trader’s outlook is wrong and the underlying futures price rises slightly, he will not suffer any loss.
Comparatively, a corresponding short futures position would have achieved a greater profit of $20000. A heavier loss of $20000 loss would have been suffered by a corresponding short futures position.
One very commonly used and frequently traded option strategy is the Butterfly Options Trading Strategy. As indicated above, the long butterfly (RED graph) will be profitable only when the underlying stock or index price doesn’t move much and remains in a narrow region. Please remember that the final net payoff function for short butterfly and long butterfly option will always remain the same, irrespective of whether they are constructed using call options or put options. This suggests that out-of-the-money calls and in-the-money puts are in greater demand compared to in-the-money calls and out-of-the-money puts.
On the other hand, the short butterfly (YELLOW graph) will be profitable to the option trader when the underlying stock or index makes a big move in either direction with a big value.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Top Binary Options Broker 2020!
    Best Choice For Beginners and Middle-Leveled Traders!
    Free Demo Account!
    Free Trading Education!
    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options: How To Start Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: