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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.