4. Synthetic Short Futures (Split-Strike)

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