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+A Complete Guide to the Futures mArket
+call (or if prices decline below $1,150, increase the value of the put) by an equivalent amount. Thus, 
+as long as the expiration date and strike price of the two options are identical, a long call/short put 
+position acts just like a long futures contract.
+The futures equivalent price implied by a synthetic position is given by the following formula:
+Synthetic  futures pos itio n prices trike pricec all prem ium=+ − −put premi um
+It should be noted there will be one synthetic futures position price corresponding to each strike 
+price for which options are traded for the given futures contract.
+In this example, the synthetic long position is the same price as a long futures contract. (Synthetic 
+futures position price = $1,150 + $70.10 − $19.90 = $1,200.20.) Thus, ignoring transaction costs 
+and interest income effects, buying the August $1,150 call and simultaneously selling the August 
+$1,150 put would be equivalent to buying an August futures contract. Of course, the trader consider-
+ing this strategy as an alternative to an outright long futures position must incorporate transaction 
+costs and interest income effects into the calculation. In this example, the true cost of the synthetic 
+futures position would be raised vis-à-vis a long futures contract as a result of the following three 
+factors:
+ 1. Because the synthetic futures position involves two trades, in a less liquid market, it is reason-
+able to assume the execution costs will also be greater. In other words, the option-based strategy 
+will require the trader to give up more points (relative to quoted levels) in order to execute the 
+trade.
+ 2. The synthetic futures position will involve greater commission costs.
+ 3. The dollar premium paid for the call ($7,010) exceeds the dollar premium received for the put 
+($1,990). Thus, the synthetic futures position will involve an interest income loss on the differ-
+ence between these two premium payments ($5,020). This factor, however, would be offset by 
+the margin requirements on a long futures position.
+Once the above differences are accounted for, the apparent relative advantage a synthetic futures 
+position will sometimes seemingly offer will largely, if not totally, disappear. Nonetheless, insofar as 
+some market inefficiencies may exist, the synthetic long futures position will sometimes offer a slight 
+advantage over the direct purchase of a futures contract. In fact, the existence of such discrepancies 
+would raise the possibility of pure arbitrage trades.
+3 For example, if the price implied by the synthetic 
+long futures position was less than the futures price, even after accounting for transaction costs and 
+interest income effects, the arbitrageur could lock in a profit by buying the call, selling the put, and 
+selling futures. Such a trade is called a reverse conversion. Alternately, if after adjusting for transaction 
+costs and interest income effects, the implied price of the synthetic long futures position were greater 
+than the futures price, the arbitrageur could lock in a profit by buying futures, selling the call, and 
+buying the put. Such a trade is called a conversion.
+3 Pure arbitrage implies a risk-free trade in which the arbitrageur is able to lock in a small profit by exploiting 
+temporary price distortions between two related markets.