Synthetic Long
Mimics the payoff of the long futures instrument
Market View:
NA
Implementation:
Buy a ATM Call Option and Sell a ATM Put Option
- Buy 1 ATM call option (Leg 1)
- Sell 1 OTM Put option (leg 2)
Mimics the payoff of the long futures instrument
NA
Buy a ATM Call Option and Sell a ATM Put Option
Based on Put Call Parity, arbitrage equation is–
Long Synthetic long + Short Futures = 0
i.e Long ATM Call + Short ATM Put + Short Futures = 0
An arbitrage opportunity is created when Synthetic long + short futures yields a positive non zero P&L upon expiry