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1. Lecture No 61
Short Synthetic Future
Rohan Sharma (Coach)

2. Basics Concepts – Short Synthetic Future
Proficiency -
Expert
Direction –
Bearish
Volatility – N/A
Asset Leg –
Long Put + Short
Call
Max Risk -
Unlimited
Max Reward -
Unlimited
Capital Gain
Strategies

3. Description – Short Synthetic Future
 We can synthetically create the risk profile or a short stock position
by buying ATM puts and selling ATM calls.
The net result is a virtually nil cost or even net credit trade that
precisely mimics the short stock or short future position.
Buy an ATM put.
Sell an ATM call with the same strike and expiration date.

4. Steps to Trading a Short Synthetic Future
Steps In
Try to ensure that the trend is downward and identify a clear area
of resistance.
Steps Out
Manage your position according to the rules defined in your Trading
Plan.
Play the strategy just as you would if you’d simply shorted the stock.
The difference is that with a Short Synthetic Future, you can leg out
of the trade, maximizing your trading opportunity.
Never hold the long option into the last month before expiration.

5. Context - Short Synthetic Future
Outlook
With Short Synthetic Futures, your outlook is bearish.
Rationale
To simulate the action of shorting a stock.
This also simulates the action of taking a short position in a future.
Net Position
This is usually a net credit trade.
It can depend on how close the strike price is to the stock price and whether it
is above or below the stock price.
Your risk on the trade itself is uncapped on the upside as the stock rises.

6. Context – Short Synthetic Future
Effect of Time Decay
Time decay helps your Short Synthetic Future trade, but with this
strategy, you are hedging time decay by buying and selling near the
money options, so the effect is minimal.
What you lose from the Long Put time value, you benefit from the
Short Call position.
Appropriate Time Period to Trade
 you will be using this strategy in conjunction with another trade.
It is generally more sensible to use this as a shorter -term trade.
Breakeven = [Strike price + net Credit](or – Net Debit)

7. Exiting the Trade - Short Synthetic Future
Exiting the Position
 With this strategy, you can simply unravel the spread by selling
your puts and buying back the calls.
You can also exit just your profitable leg of the trade and hope that
the stock moves to favor the unprofitable side later on.
Mitigating a Loss
Sell the position if the stock rise up through your predetermined
stop loss.

8. Advantages and Disadvantages
Advantages
Create a short stock position with the ability to leg in and out of the
call or put as appropriate.
Uncapped profit potential as the stock declines to zero (though this
could equally be described as being capped reward after the stock
has fallen to zero!).
Disadvantages
No leverage or protection created by the position.
Uncapped risk potential if the stock rises.
Bid/Ask Spread can adversely affect the quality of the trade.

9. Real Time Example
Rohan Sharma (Coach)

10. Price Movement
Position on Charts
Rohan Sharma (Coach)

12. Example – Short Synthetic Future
Market Behavior Nifty
Option /Future Buy ATM Call & Sell ATM PUT
Action (Long/ Short) Both
Price Movement Expectation DownSide / Side Ways
Spot Price 11700
Strike Price (LONG ATM PUT) 11700
Premium Paid /Receive 110
Strike Price ( SHORT ATM CALL) 11700
Premium 100
Break Even Strike + Net Debit (11700 +10) = 11710
Time to Expiry Mid/Last of the Month
Position of Price in Charts At Absolute Bottom / Higher Bottom in Upward Trend
Max Risk Un Limited
Max Reward Un Limited

13. Short Synthetic Future
Strike Price (LONG ATM Put) 11700 Premium 110 BEP 11590
Strike Price ( SHORT ATM Call) 11700 Premium 100 BEP 11800
Nifty at Expiry LONG ATM PUT
(BEP) 11590
SHORT ATM CALL
(BEP) 11800
Total P&L
12200 -110 -400 -510
12100 -110 -300 -410
12000 -110 -200 -310
11900 -110 -100 -210
11800 -110 - -110
11700 -110 100 -210
11600 -10 100 -90
11500 100 100 200
11400 200 100 200