Long Synthetic Future

Long Synthetic Future

Post By - Manav Saini
Review By : Rohan Sharma
Updated on : October 24, 2021

Basics Concepts - Long Synthetic Future

Description – Long Synthetic Future

We can synthetically create the risk profile or a long stock by selling ATM puts and buying ATM calls.
The net result is a very inexpensive, nil cost, or even net credit trade that precisely mimics the long stock or long future position.
Sell an ATM put.
Buy an ATM call with the same strike and expiration date.

Steps to Trading a Long Synthetic Future

Steps In

Try to ensure that the trend is upward and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Play the strategy just as you would if you’d simply bought the stock.
The difference is that with a Long Synthetic Future, you can leg out of the trade, maximizing your trading opportunity.
Never hold the long option into the last month before expiration.

Context - Long Synthetic Future

Outlook

With Long Synthetic Futures, your outlook is bullish.

Rationale

To simulate the action of buying a stock, but to do so with a fraction of the cost.
This also simulates the action of taking a long position in a future.

Net Position

This is usually a net debit trade.
It can depend on how close the strike price is to the stock price and whether it is above or below the stock price.
Your risk on the trade itself is uncapped on the downside until the stock falls down to zero.

Effect of Time Decay

Time decay is harmful to your Long Synthetic Future trade, but with this strategy, you are hedging time decay by buying and selling near the money options, so the effect is minimal.

Appropriate Time Period to Trade

you will be using this strategy in conjunction with another trade.
It is generally more sensible to use this as a longer-term trade.
Breakeven = [Strike price + net debit]

Exiting the Trade - Long Synthetic Future

Exiting the Position

With this strategy, you can simply unravel the spread by selling your calls and buying back the puts.
You can also exit just your profitable leg of the trade and hope that the stock moves to favor the unprofitable side later on.

Mitigating a Loss

Sell the position if the stock breaks down through your predetermined stop loss.

Advantages and Disadvantages

Advantages

Create a long stock position with virtually zero capital outlay.
Capped risk down to the stock falling to zero (though this could be argued the other way too; i.e., uncapped risk down to zero!).
Uncapped profit potential if the stock appreciates.

Disadvantages

No leverage or protection created by the position.
No dividend entitlement.
Bid/Ask Spread can adversely affect the quality of the trade.

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