Section 5: Using synthetic positions
Options can also be used to create synthetic positions. If you have a call option that is in the money and you are now expecting a reversal you could simply short a futures contract and have the same exposure to the market that someone who purchased a put would have. If the market goes up you have a call making you money and a short futures position that will lose the same amount. But if the market goes down you make money on your short futures, this is the same profit and loss outlook as the holder of a put option.
The major synthetic positions are listed below. One advantageous method for using these positions is to trade into and out of them. By understanding that shorting a futures position against a call creates a synthetic put, you now have an easier method to establish such a position without having to abandon your original position. You can potentially save commission costs and move more nimbly between positions by incorporating these techniques.
Combining two assets that, together, behave the same way as a related individual asset creates a synthetic position.
Synthetic Long Call
Long a put and long a futures contract
Synthetic Long Put
Long a call and short a futures contract
Synthetic Short Call
Short a put and short the futures contract
Synthetic Short Put
Short a call and long a futures contract
Futures-Option-Trading.com
1: Futures option trading basics
2: How to price futures options
3: Understanding the Greeks
4: Using option spreads
5: Synthetic options and futures
6: Strategies
7: Tips for buying and selling
8: Risk Disclosures for options
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