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The synthetic short futures (split strikes) is a less aggressive version of the synthetic short futures.

The synthetic short futures (split strikes) position is created by selling slightly out-of-the-money calls and buying an equal number of slightly out-of-the-money puts of the same underlying futures and expiration month.

Synthetic Short Futures (Split Strikes) Construction |

Sell 1 OTM Call Buy 1 OTM Put |

The split strike version of the synthetic short futures strategy offers some upside protection. If the trader's outlook is wrong and the underlying futures price rises slightly, he will not suffer any loss. On the flip side, a stronger downward move is necessary to produce a profit.

Profits and losses with a split strike strategy are also not as heavy as a corresponding short futures position as the strategist has traded some potential profits for upside protection.

Similar to a short futures position, there is no limit to the maximum possible profit for the synthetic short futures (split strikes). The options trader stands to profit as long as the underlying futures price goes down.

The formula for calculating profit is given below:

- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying < Strike Price of Short Call + Net Premium Received OR Price of Underlying < Strike Price of Long Put - Net Premium Paid
- Profit = Strike Price of Long Put - Price of Underlying +/- Net Premium Received/Paid

Synthetic Short Futures (Split Strikes) Payoff Diagram

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Like the short futures position, heavy losses can occur for the synthetic short futures (split strikes) if the underlying futures price makes a sharp move upwards.

Often, a credit is usually taken when establishing this position. Hence, even if the underlying futures price remains unchanged on expiration date, there will still be a profit equal to the initial credit received.

The formula for calculating loss is given below:

- Maximum Loss = Unlimited
- Loss Occurs When Price of Underlying > Strike Price of Short Call + Net Premium Received OR Price of Underlying > Strike Price of Long Put - Net Premium Paid
- Loss = Price of Underlying - Strike Price of Short Call +/- Net Premium Paid/Received + Commissions Paid

The underlier price at which break-even is achieved for the synthetic short futures (split strikes) position can be calculated using the following formula.

- Breakeven Point = Strike Price of Short Call + Net Premium Received OR Strike Price of Long Put - Net Premium Paid

Suppose June Crude Oil futures is trading at $40 and each contract covers 1000 barrels. An options trader enters a split-strikes synthetic short futures position by buying a JUN 35 put for $2000 and selling a JUN 45 call for $2200. The net credit received when entering the trade is $200.

If June Crude Oil futures drops to $35 on expiration date, both the long JUN 35 put and the short JUN 45 call will expire worthless and the trader keeps the initial credit of $200 as profit.

If the price of June Crude Oil futures falls dramatically to $20, the short JUN 45 call will expire worthless while the long JUN 35 put will expire in the money and be worth $15000. Including the initial credit of $200 received, the options trader's net profit comes to $15200. Comparatively, a corresponding short futures position would have achieved a greater profit of $20000.

If the price of June Crude Oil futures has instead surged to $60 on option expiration date, the short JUN 35 put will expire worthless while the long JUN 45 call will expire in the money and be worth $15000. Buying back this long call will require $15000 and subtracting the initial $200 credit received when entering the trade, the trader's net loss comes to $14800. A heavier loss of $20000 loss would have been suffered by a corresponding short futures position.

There is a more aggressive version of this strategy where both the call and put options involved are at-the-money. While a smaller downside movement of the underlying futures price is required to accrue large profits, this alternative strategy provides less room for error.

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