Synthetic Futures: A Comprehensive Guide to Their Legal Definition
Definition & Meaning
Synthetic futures are financial positions created by combining options contracts. Specifically, a synthetic long futures position is established by pairing a long call option with a short put option, both having the same expiration date and strike price. Conversely, a synthetic short futures position is formed by combining a long put option with a short call option, also sharing the same expiration date and strike price. This strategy allows traders to mimic the behavior of traditional futures contracts without directly trading them.
Legal Use & context
Synthetic futures are commonly used in financial markets and can have legal implications in various areas, including securities law and derivatives trading. They are particularly relevant for traders and investors who wish to hedge risks or speculate on price movements without entering into standard futures contracts. Users can manage their synthetic futures positions using legal templates available through services like US Legal Forms, which provide guidance on the necessary documentation and compliance requirements.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A trader believes that the price of a commodity will rise. They purchase a long call option and sell a put option with the same strike price and expiration date. This creates a synthetic long futures position, allowing them to benefit from the anticipated price increase.
Example 2: A trader expects a decline in the price of a stock. They buy a long put option and sell a call option with the same parameters. This forms a synthetic short futures position, allowing them to profit from the expected decrease in value. (hypothetical example)