Definition
Synthetic Futures
Synthetic futures replicate a futures position using options — a long call plus short put (or the reverse) at the same strike.
Buying a call and selling a put at the same strike and expiry creates a synthetic long future; selling a call and buying a put creates a synthetic short future. The payoff matches the actual future, but options may offer better liquidity, pricing, or margin in some cases.
Indian arbitrageurs and traders use synthetic futures on Nifty and stocks to exploit put-call parity mispricing or when the synthetic is cheaper than the real future after costs. The risk profile equals a real futures position, so the same SPAN-style margin discipline applies.
Related terms
- Synthetic LongA synthetic long replicates owning the underlying by buying a call and selling a put at the same strike.
- Synthetic ShortA synthetic short replicates short-selling the underlying by selling a call and buying a put at the same strike.
- Cash-and-Carry ArbitrageCash-and-carry arbitrage profits from a futures premium by buying the stock in cash and selling its future simultaneously.
- Put-Call ParityPut-call parity is the pricing relationship that links the prices of a call, a put, the underlying, and the strike at the same expiry.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.