What is it?
- Synthetic futures is an option strategy that acts like a futures contract.
- Long synthetic futures – Buying a call option of a strike, and simultaneously selling the put option of the same strike is the same as buying a futures contract.
- Short synthetic futures – Selling a call option of a strike, and simultaneously buying the put option of the same strike is the same as selling a futures contract.
Why do it?
The transaction charges of futures are very high due to STT.
- For example, In NIFTY for 10 lots
- For futures, the total charges would come to around 2000 Rs for in and out (Buy and Sell futures)
- In the case of synthetic futures, it would be just 400 Rs for in and out (Buy Call Sell Put + Sell Call Buy Put)
How to do it?
Long synthetic futures
In order to do it, open Sensibull’s Strategy Builder, scroll down to the ready-made strategies section and select Long Synthetic Future under the Bullish section.
Short synthetic futures
In order to do it, open Sensibull’s Strategy Builder, scroll down to the ready-made strategies section, switch to the Bearish section, and select Short Synthetic Future.
What are the risks?
1. Illiquidity Risk
Almost all futures contracts are always liquid. But the options can become illiquid if they go in the money. This means if you took a synthetic futures contract and one of the options became illiquid, you will not be able to exit. But this can be solved by taking an opposite synthetic futures contract with a liquid call and put strike, usually near the current ATM
2. Execution Risk
There are two transactions here. So there is an execution risk issue, if you do not enter the two legs together.
You can try this strategy out on Sensibull for free if you are a Zerodha or Angel One user.