Short Synthetic Future

Short Synthetic Future

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 24, 2021

Basics Concepts – Short Synthetic Future

Description – Short Synthetic Future

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

Steps to Trading a Short Synthetic Future

Steps In

Try to ensure that the trend is downward and identify a clear area of resistance.

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 shorted the stock.
The difference is that with a Short 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 - Short Synthetic Future

Outlook

With Short Synthetic Futures, your outlook is bearish.

Rationale

To simulate the action of shorting a stock.
This also simulates the action of taking a short position in a future.

Net Position

This is usually a net credit 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 upside as the stock rises.

Effect of Time Decay

Time decay helps your Short 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.
What you lose from the Long Put time value, you benefit from the Short Call position.

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 shorter -term trade.
Breakeven = [Strike price + net Credit](or – Net Debit)

Exiting the Trade - Short Synthetic Future

Exiting the Position

With this strategy, you can simply unravel the spread by selling your puts and buying back the calls.
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 rise up through your predetermined stop loss.

Advantages and Disadvantages

Advantages

Create a short stock position with the ability to leg in and out of the call or put as appropriate.
Uncapped profit potential as the stock declines to zero (though this could equally be described as being capped reward after the stock has fallen to zero!).

Disadvantages

No leverage or protection created by the position.
Uncapped risk potential if the stock rises.
Bid/Ask Spread can adversely affect the quality of the trade.

Share this Content

Derivatives Analysis

Advanced Option Strategy