What are synthetic long futures? Are they a good strategy?

Synthetic Long Futures

This is an options strategy that is used to simulate a false long futures position. A trader can simulate this position by entering into a contract for at-the-money call options and selling an equal number of at-the-money put option on the same underlying futures, with the same time of expiration.

Traders who don't want to buy futures outright but find themselves bullish on them might get into a form of strategy.

For example, with stock A trading at 100 USD, say there is sold 20 units put option and buying 20 units call. If prices rise to 200 then while the put options will expire, the call options will provide profit of 100 USD each, or total 2000 USD.

On the other hand, if prices drop to 50 USD then there will be a huge loss to cover.


Factors Involved

Synthetic long futures usually have

  1. Unlimited profit potential: In this way, it simulates a long futures position. The trader will continue to profit as long as the price of the underlying instrument keeps going up.

  2. Unlimited risk potential: This is why, despite the unlimited profit potential, this is not an unambiguously good strategy. If the price of the underlying instrument falls heavily, then the trader could lose massive amounts.

  3. Upfront investment: Despite the fact that the trader is trading in options, for this, you will need to invest with margin involved. The margin will be more or less the same as needed for the equivalent futures position. The margin requirements are very similar during trading.


Split Strikes

Synthetic long futures with split strikes is a way to hedge the risk involved with synthetic long futures.

Here, the call options bought and the put options sold are out of the money instead of at the money.

Here, the price of the long synthetic future is less sensitive to the price of the underlying futures. This means that a higher rise is needed at the futures price for a similar profit in this variation as compared to the normal one.

However, it allows for smaller risks as well, so many traders prefer this version.