Article Get into Low Cost Futures Trading with Synthetics

T2W Bot

Staff member
There is a constant push for portfolio diversification into alternative investments, such as futures and commodities, but oftentimes it is difficult to make the leap. That’s where the concept of synthetic futures comes in. For those looking to avoid a huge initial investment and manageable risk, synthetic futures provide an opportunity to help you ease into portfolio diversification without betting the farm.
An Influential StudyIn 2004, a brief but powerful white paper was put out by the Yale International Center for Finance. The paper was entitled “The Facts and Fantasies about Commodity Futures”. In the paper, the authors set out to answer two questions
    Are commodity futures riskier than stocks?
    Can commodity futures provide diversification to other asset classes?
The answer to the first question was a resounding “no”. The study revealed that more than 45 commodity futures were not only comparable to the S&P 500, but they also consistently outperformed corporate...

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jason

you seem to have forgotten one major point which makes this article useless

so in your first example if you sell a put (firstly there will be a spread so the price to buy a put is not the same amount as selling the put but even without that)
whenever you sell an option you have to have margin to cover you just incase it goes against you. so in this case every broker would require a margin just in case it went below $960
i fail to see any logic in this. especially as you would be paying two spreads and option spreads are much wider than future or spot spreads.

easiest way is to open a high margin cfd account and if you are lucky place a guaranteed stop to lower the margin requirement
 

moka2

Established member
What about MArgin

"<span>the same position as a synthetic long would cost you only $210. That's a savings of $4,515."
</span>1) In both examples what about the the margin that is required for the naked soled option leg?
SO for a synthetic long the ATM PUT is a naked position and wil require similar margin to a Futures position
The article sound s like IT will only cost 210 instead of 4995, How accurate is that? something does not match!
Yes it is true that the $2500 you receieved will reduce the cost of purchasing the CALL
2) Are you not mixing "Margin" which is refundable as compared to "premium" that is not refundable!
 

moka2

Established member
http://www.theoptionsguide.com/synthetic-long-futures.aspx
This I think clarifies the point ( same one Jason made about this article)
What would be more intersting is if an expert can write about Arbitrage between
Sunthtic Long using options and/ Underlying short
- Is it doable?
- does it exist?
- What margins are required?

Upfront Investment
Some novice futures traders mistakenly believe that the synthetic long futures strategy requires very little upfront investment. They assumed that by trading options instead of futures, they can avoid posting the margin. Unfortunately, the short put position is subjected to the same margin requirements as a short futures position. Hence, the synthetic long futures position requires more or less the same upfront investment as a regular long futures position.
 

JackRab

Member
This has got to be the worst advice ever... as mentioned in the other comments, margin is necessary on the short put...

And on top of that, the spreads in options are always bigger than in the futures... doubling that spread, since trading in a call and in a put... makes a synthetic a lot more expensive than the future... except if you're a pro, you might be able to get a decent price on the synthetic vs future (so called reversal or conversion).

And I almost forgot, broker fees are typically higher on options than on futures, again x2...

This article is rubbish...
 

Mr Sept

Well-known member
this has got to be the worst advice ever... As mentioned in the other comments, margin is necessary on the short put...

And on top of that, the spreads in options are always bigger than in the futures... Doubling that spread, since trading in a call and in a put... Makes a synthetic a lot more expensive than the future... Except if you're a pro, you might be able to get a decent price on the synthetic vs future (so called reversal or conversion).

And i almost forgot, broker fees are typically higher on options than on futures, again x2...

This article is rubbish...

agreed
 

JackRab

Member
http://www.theoptionsguide.com/synthetic-long-futures.aspx
This I think clarifies the point ( same one Jason made about this article)
What would be more intersting is if an expert can write about Arbitrage between
Sunthtic Long using options and/ Underlying short
- Is it doable?
- does it exist?
- What margins are required?

- Is it doable?
> yes, certainly...
- Does it exist?
> Synth long options and short underlying is called a 'reversal'. This is traded by pros all the time.
- What margins are required?
> Depends on how your broker calculates your margin. Since you're trading delta neutral, there shouldn't be too much margin...

However, there are some risks involved. You will have a dividend exposure (short dividend position in this case), you will have interest rate exposure and you will have an extra risk because you are short the underlying, and you pay interest to borrow the underlying to short it (in single stocks).

All costs involved makes this a no-no for retail traders. Usually pros trade this to reduce any dividend risk or long/short stock position. Or close out a position on their options books.

A large net long or short position in in stocks and synthetic futures is always risky in case of an upcoming corporate action.
 
 
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