How to buy synthetic futures?

by Jennifer

Synthetic futures offer investors an alternative way to gain exposure to the price movements of underlying assets without directly purchasing the physical asset or traditional futures contracts. By using derivatives such as options and swaps, investors can replicate the payoff profile of futures contracts, allowing for greater flexibility and customization in their trading strategies. In this article, we will explore the concept of synthetic futures, the benefits and risks associated with them, and step-by-step guidance on how to buy synthetic futures effectively.

Understanding Synthetic Futures

Synthetic futures are financial instruments created synthetically through the combination of options or swaps to replicate the risk and return characteristics of traditional futures contracts. Unlike traditional futures contracts, which involve an obligation to buy or sell an underlying asset at a predetermined price on a future date, synthetic futures provide investors with the opportunity to speculate on price movements without the need for physical delivery or margin requirements associated with futures trading.


Benefits of Synthetic Futures

One of the primary benefits of synthetic futures is their flexibility and customization options. Investors can tailor synthetic futures contracts to meet their specific trading objectives, including desired expiration dates, strike prices, and risk profiles. Additionally, synthetic futures may offer cost advantages compared to traditional futures contracts, as they may require lower initial capital outlay and margin requirements. Furthermore, synthetic futures allow investors to gain exposure to a wide range of underlying assets, including stocks, bonds, currencies, commodities, and indices, without the need for direct ownership or physical delivery.


Risks of Synthetic Futures

While synthetic futures offer several benefits, they also entail certain risks that investors should be aware of before engaging in trading activities. One of the primary risks of synthetic futures is the potential for loss, as these instruments involve leveraged positions and may result in substantial losses if market conditions move against the investor’s expectations. Additionally, synthetic futures are subject to counterparty risk, as investors rely on the performance and creditworthiness of the counterparties involved in the derivative transactions. Furthermore, synthetic futures may be more complex and less transparent than traditional futures contracts, requiring a thorough understanding of derivative pricing models and strategies.

Step-by-Step Guide to Buying Synthetic Futures

Define Your Trading Objectives: Before purchasing synthetic futures, it is essential to define your trading objectives, including your desired exposure, risk tolerance, and investment horizon. Determine whether you are seeking speculative opportunities, hedging against price movements, or implementing a specific trading strategy.

Select the Underlying Asset: Identify the underlying asset or market you wish to gain exposure to through synthetic futures. This could include stocks, commodities, currencies, interest rates, or indices, depending on your trading preferences and market outlook.

Choose the Derivative Instruments: Determine which derivative instruments you will use to create synthetic futures contracts. Common options strategies used to create synthetic futures include long call options combined with short put options or vice versa. Alternatively, synthetic futures can be constructed using swaps, such as total return swaps or interest rate swaps, to replicate the payoff profile of traditional futures contracts.

Calculate the Position Size: Determine the appropriate position size for your synthetic futures contracts based on your risk management strategy, trading capital, and leverage preferences. Consider factors such as volatility, margin requirements, and potential loss scenarios when determining the size of your positions.

Execute the Trade: Once you have defined your trading objectives, selected the underlying asset, chosen the derivative instruments, and calculated the position size, you can proceed to execute the trade through your chosen brokerage platform or financial institution. Place your orders to buy or sell the relevant options or swaps to create synthetic futures contracts according to your trading plan.

Monitor and Manage Your Positions: After establishing your synthetic futures positions, monitor market conditions, price movements, and relevant news events to assess the performance of your trades. Implement risk management techniques, such as stop-loss orders, profit targets, and position adjustments, to manage your positions effectively and mitigate potential losses.

Close Out or Roll Over Positions: Depending on your trading strategy and market outlook, you may choose to close out your synthetic futures positions by unwinding the derivative transactions or rolling over your positions to new expiration dates or strike prices. Evaluate market conditions and your trading objectives to determine the appropriate course of action for your positions.


In conclusion, synthetic futures provide investors with a flexible and customizable alternative to traditional futures contracts, allowing for greater precision in trading strategies and risk management. By combining options or swaps, investors can replicate the risk and return characteristics of futures contracts on a wide range of underlying assets, including stocks, commodities, currencies, and indices. However, synthetic futures also entail certain risks, including leverage, counterparty risk, and complexity, which investors should carefully consider before engaging in trading activities. By following a systematic approach and implementing effective risk management techniques, investors can navigate the complexities of synthetic futures trading and capitalize on opportunities in the financial markets.

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