The components required to establish a long synthetic futures contract are the purchase of a call option and the sale of a put option of the exact same price. That call gives you access to unlimited profit potential, but the sold put opens you up to unlimited loss on the downside. This strategy works best when you buy and sell both options at-the-money; you can collect the maximum amount of premium. Table 12.1 Synthetic Long Futures Position Strike Price Premium Buy call 1350 –16.70 (–$4,175) Sell put 1350 +13.80 (+$3,450) –2.90 (–$725) These two scenarios are a huge difference in price. The first margin requirement of $22,500 doesn't compare to the net margin requirement of $725. This is like night and day. This is a huge difference in price, $21,775 to be exact. But the trade can't be left naked. It has to treated and protected just like a naked position. Either you can use an option as a hard stop or you can create a collar on the position. Based on this example for $3,000 to $4,000, a slightly out-of-the-money protective put can be purchased at 1345. This would make the maximum loss of the sold put limited to 5 points. This protective measure also has the potential to encourage your FCM or brokerage to minimize their restrictions on your selling options. So for a total of $4,725 you are trading the value of a full-sized S&P 500 contract, with risk management protection—the same margin price that an Emini S&P contract would cost without any risk management in place. This contract is still a futures contract, though, so you do end up picking a side, long or short. If the market doesn't move in that direction, you will lose value in your premium. Therefore you must watch the values of the various premiums, and if the market is moving against your position, simply exit the position entirely.
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