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1990issue C091-2

Synthetic option parity in limit-locked futures

When a commodity future locks at its daily trading limit, the listed month can stop accepting orders. This archive case follows a locked soybean session and a same-day wheat comparison through contract selection, the same-strike synthetic long, and conversion linkage.

  • A daily trading limit can halt further trade in the direction of a large move and leave an existing futures position unable to exit in the listed contract.
  • When the listed month is locked, an earlier workaround was to select another delivery or a related commodity that was still open and hold that market as a spread against the frozen position.
  • Buying a call and selling a put at the same strike builds a synthetic long futures position intended to move with the underlying contract even while that contract is locked.
  • When the listed future is locked limit-up or limit-down, the still-trading synthetic can adjust a directional position and show how much strength sits beyond the posted limit.
Entries in this reading3 entries
Current trackSynthetic option position16 readingsFutures contract selection57 readingsOption spread61 readings

Many commodity futures sessions halt further trade in the direction of a large move once price has traveled a set distance from the prior close. That daily trading limit can leave an existing futures position unable to exit in the listed contract.

A locked-limit session

A locked-limit session is a session in which the listed future is bid or offered at the allowed extreme and cannot print a farther price, while options on that contract may still trade.

Selecting a contract that can still trade

When the listed month is locked, an earlier workaround was to select another delivery or a related commodity that was still open and hold that market as a spread against the frozen position. Contract selection asks which delivery month or related commodity is still open, and whether the target listing is locked, so any hedge is placed in a market that can still accept orders.

The same-strike synthetic long

Buying a call and selling a put at the same strike builds a synthetic long futures position intended to move with the underlying contract even while that contract is locked at its daily limit. That option spread, the paired purchase and sale of a call and a put at one strike, funds and prices the synthetic futures equivalent so the package tracks the listed contract when the future cannot trade through its daily limit.

A locked soybean print

On 5 July 1989, November 1989 soybeans finished limit bid at 7.02 while the 7.00 call settled at 55.5 cents and the 7.00 put at 44 cents, so the same-strike synthetic long cost about 11.5 cents. After removing about 2 cents of intrinsic value from those 7.00 calls, the soybean synthetic stood about 9.5 cents above the locked futures print, which was the price at which a long equivalent could still be bought.

A trader already short that locked soybean future could open the long synthetic as protection against a further advance that the listed contract could not yet print.

Conversion in an unrestricted session

Listed futures and the same-strike synthetic stay linked by conversion. In an unrestricted session, buying the cheaper futures and selling the synthetic long continues until the two prices reconverge. That conversion-arbitrage buys the cheaper of the listed future and the synthetic long and sells the richer until those prices reconverge.

A same-day wheat comparison

On the same date, December 1989 wheat closed at 4.23-3/4, up 8.5 cents, and the 4.20 call and put showed matching 18-cent residual time value after 3.75 cents of call intrinsic value was removed.

What still updates at the limit

When the listed future is locked limit-up or limit-down, the still-trading synthetic both allows a directional position to be adjusted and shows how much strength sits beyond the posted limit.

Locked November soybeans: synthetic long versus the limit

A trader short November soybeans on 5 July 1989 could not buy the locked $7.02 future, but the same-strike 7.00 package still quoted. The call settled 11.5 cents above the put; after the 2 cents of intrinsic in that call, the synthetic still sat 9.5 cents through the limit — the only price that could still be hit. Those three figures are the settlements and the arithmetic the article states.
A trader short November soybeans on 5 July 1989 could not buy the locked $7.02 future, but the same-strike 7.00 package still quoted. The call settled 11.5 cents above the put; after the 2 cents of intrinsic in that call, the synthetic still sat 9.5 cents through the limit — the only price that could still be hit. Those three figures are the settlements and the arithmetic the article states.CBT November 1989 soybeans · 5 July 1989 settlement · 1989-07-05T00:00:00.000Z to 1989-07-05T00:00:00.000Z

Nearest-the-money 7.00 strike on CBT November 1989 soybeans; the article notes any same-strike call-and-put pair leaves the same residual after intrinsic.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
1 of 16 in the Synthetic option position track
19911-9 pp.Next on Synthetic option positionConstructing synthetic option positions with puts and spreadsA synthetic security is assembled by buying and writing options so the combined profit-and-loss path emulates another single instrument.
All readings on this track · 16 readings
  1. 1990Synthetic option parity in limit-locked futures
  2. 1991Constructing synthetic option positions with puts and spreads
  3. 1991Synthetic stock and protective put payoff construction
  4. 1993Equivalent option strategies as a capital and execution checklist
  5. 1993Keep a futures loss bounded when stops fail
  6. 2001Financed call ratio repair for a gapped long
  7. 2003Synthetic long construction with delta and margin checks
  8. 2003Cash-covered split-synthetic after a decline
  9. 2004Constructing synthetic calls and puts with stock
  10. 2006In-the-money calls as bounded synthetic leverage
  11. 2006Credit construction of a synthetic long call via futures and a long put
  12. 2006Convert a support-and-resistance range into one synthetic option procedure
  13. 2007Long-call adjustment via a synthetic straddle
  14. 2008Constructing protective puts and synthetic option packages
  15. 2018An uneven vertical debit spread as a stock proxy
  16. 2020Out-of-the-money strikes as a delta budget for synthetic futures
By fieldOptions and volatility171 readingsBy year199092 readings
All 16 readings tagged Synthetic option position
Also on Synthetic option position5 readings
1991Constructing synthetic option positions with puts and spreads1993Equivalent option strategies as a capital and execution checklist2001Financed call ratio repair for a gapped long2004Constructing synthetic calls and puts with stock2006Convert a support-and-resistance range into one synthetic option procedure