Option Arbitrage & Synthetics

Short description:

Setup an arbitrage strategy; using synthetics.

Capacity

You act in the role of an option trader. You can transact two option series (a series consists of both a call option and a put option), as well as the option’s underlying futures contract.
More specifically, you act in the capacity of aggressor.

Task

Your task is to set up the following strategies (involving options and, possibly, also an underlying futures contract) and watch the overall value of each of these strategies to develop:

Conversion: short call & long put (of same series) + long underlying future
Reversal: long call & short put (of same series) + short underlying future
Box: short call & long put (of same series) + long call & short put (of other series)

After having setup one of the strategies verify your P/L; it should not change.

Objective

The aim of this simulation is manifold, namely, amongst others, to master and apply the put-call parity and to understand what a strategy, like a conversion, a reversal or a box, does to the financial performance (P/L).

Conclusion

At the end of the simulation, analyse your performance. See in which cases you have locked in a profit or loss, due to non-simultaneously transacting the individual legs.

 

Our Labels

Entrima and Market Abuse Centre (MAC) are the two labels we operate to provide learning services for professionals in the commodity & energy markets.
 
 


Content & Context

Entrima’s mission is to transfer knowledge regarding the business, controls & operations of parties in (or relating to) the wholesale markets.

www.entrima.org


Conduct & Culture

MAC’s mission is to facilitate the prevention & detection of misconduct and to foster proper behaviour in organisations. This is achieved via training, periodic updates and increased awareness.

www.marketabusecentre.com