Synthetic Call

If the price of corn is at $5.60, and the sentiment of the market has a long side bias, then you have two choices. You can either purchase the futures position and put up $1,350 in margin, or buy a call for $3,000. While the outright futures contract requires less than the call option, you'll have unlimited exposure to risk. The call option can limit your risk, but the question then becomes whether $3,000 is a fair price to pay for an at-the-money option. If the market starts to move down, how much of your premium will be lost, and how quickly will it be lost? A synthetic call lets a trader put on a long futures contract at a special spread margin rate. It is important to note that most clearing firms consider synthetic positions less risky than having outright futures positions, and therefore require less margin. Depending on the market's volatility, there can be a margin discount of 50% or more. For this market, there is a $1,000 margin discount. This special margin rate allows traders to put on a long futures contract for only $300. This is just one benefit of putting on a synthetic position. A protective put can then be purchased for only $2,000. The total cost of the synthetic call position becomes $2,300. Compare this to the $3,000 you would have to pay for a call option alone and there is an immediate savings of $700. In order to get this same type of savings you would have to purchase an out-of-the-money call option.