40 lines
3.3 KiB
Plaintext
40 lines
3.3 KiB
Plaintext
530
|
||
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. |