Synthetic Futures – Meaning, Types of Synthetic Futures

  • 2
  • January 12, 2013

Synthetic futures can help us save up to 75-80% of our transaction costs.
Let us take an example,
Buy 10 Nifty futures @ Rs 6000
Sell 10 Nifty futures @ Rs 6000

Profit/Loss = Rs 0.00
Total transaction cost = Rs 797.80 (as per our Trade Smart Online Brokerage Calculator)

 Brokerage calc options 300x267 - Synthetic Futures - Meaning, Types of Synthetic Futures

Instead, if we would have opted for Synthetic Futures (Nifty strike price 6000 @ Rs.100) the transaction cost would have been Rs 181.88 only.

Let us find out how it works:

Synthetic Futures are basically option strategies wherein we take opposite positions in call and puts of the same underlying with similar strike price and expiry. The payoff will be similar to that of futures.

I. Synthetic long futures:

Initiate position: Buy 1 ATM Call + Sell 1 ATM Put
Cover position : Sell 1 ATM Call + Buy 1 ATM Put

synthetic nifty long futures 300x180 - Synthetic Futures - Meaning, Types of Synthetic Futures

Maximum Profit=Unlimited
Maximum Loss= 6000 x Qty
Profit= Price of Underlying – Strike price of Long Call – Net Premium Paid

15 ad 728x90 - Synthetic Futures - Meaning, Types of Synthetic Futures

II.Synthetic short futures:

Similarly we can also create a short futures with options.

Initiate position: Sell 1 ATM Call + Buy 1 ATM Put
Cover position : Buy 1 ATM Call + Sell 1 ATM Put

Maximum Profit=6000 x Qtysynthetic nifty short futures 300x179 - Synthetic Futures - Meaning, Types of Synthetic Futures
Maximum Loss= Unlimited
Profit= Strike Price of Long Put – Price of Underlying – Net Premium Paid

Also Read : Collar Strategy

Transaction costs:

Transaction cost in synthetic futures as calculated below includes only charges for taking position and does not include charges for the cover operation. Hence the total transaction cost is Rs 90.94 x 2 = Rs 181.88

Brokerage calc options1 300x267 - Synthetic Futures - Meaning, Types of Synthetic Futures

Your savings = 797.8 – 181.88 = Rs 615.92 🙂

Hope you liked this post, please feel free to comment any queries or suggestion or share your experience with us.
We are look forward to share such Smart trading ideas, just be with us to get some more.

Always Trade Smartly
Open Trading Account Now

Also Read : 3 Pillars of Technical Analysis

[email-subscribers namefield=”NO” desc=”Subscribe now to get latest updates!” group=”Public”]

Leave a Reply

Open Account

Open Trading Account

Open an account with us! It barely takes few minutes!