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Long Call
Synthetic Long Futures

4. Synthetic Short Futures (Split-Strike)

synthetic short futures

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




synthetic short futures: follow-up trading strategies

Synthetic Long Futures
Long Call

Contents Courtesy of CME.com

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