3. Synthetic Long Futures (Split Strike)
Scenario:
Normally a trader enters into this position only as a follow-up strategy. Suppose the trader had a short strangle that he wanted to convert to a long futures. He can buy 2 calls (one liquidates the original short call). This nearly creates a synthetic long futures (long call, short put); however, it does so at different strike prices. The only difference in the risk/reward profile is the flat area between strikes-where little is gained or lost (depending upon the premiums and the exact strikes chosen).
| Specifics: |
|
|
| Underlying Futures Contract: |
September Euro FX |
|
| Futures Price Level: |
1.0100 |
|
| Days to Futures Expiration: |
65 |
|
| Days to Options Expiration: |
55 |
|
| Option Implied Volatility: |
14.9% |
|
| Option Position: |
Long 1 Mar .6450 Call |
- .0020 ($200) |
|
Short 1 Mar .6350 Put |
+ .0019 ($190) |
|
|
- .0001 ($ 10) |
| At Expiration: |
| Breakeven: |
.6451 (.6450 strike + 0.0001 debit) |
| Loss Risk: |
Unlimited; losses mount as futures fall past .6350 strike. |
| Potential Gain: |
Unlimited; profits increase as futures rise past .6451 breakeven. |
Things to Watch:
This position is not normally affected by changes in implied volatility. It is nearly the same as a long futures position except for the flat area between strikes. The flat area below the current futures price allows for some downside movement without loss. However, the trader gives away a little upside potential. Check the next page for follow-up strategies.
Follow-up Trading Strategies
