Synthetic Futures Contract

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Paul Tracy

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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated January 16, 2021

What is a Synthetic Futures Contract?

A synthetic futures contract comprises call options accompanied by put options in order to imitate the attributes of a futures contract.

How Does a Synthetic Futures Contract Work?

A synthetic long futures contract can be simulated using a short put option in conjunction with a long call option. Conversely, a synthetic short futures contract can be replicated by placing a long put option accompanied by a short call. In order to be effective, the strike price and expiration date must be identical. For instance, a synthetic long futures contract on stock XYZ would comprise a put option and a call option as described, both of which would have the same expiration date of (e.g. 31 December 2009) and strike price (e.g. $75).

Why Does a Synthetic Futures Contract Matter?

A synthetic futures contract allows an investor to benefit from the attributes and manner of payment of a futures contract without taking on the risks and obligations which a futures contract comprises.

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