Synthetic Futures in Indian Markets: A Worked Reliance Example

What A Synthetic Future Actually Is

A synthetic future is an options position that copies the profit and loss of an actual futures contract. To build a synthetic long future, you buy a call option and sell a put option at the same strike price and same expiry. To build a synthetic short future, you do the reverse: sell the call and buy the put. The two option legs together produce a straight line payoff that rises and falls one for one with the price of the underlying, which is exactly what a real future does.

The reason this works comes from put call parity, a fixed relationship between call prices, put prices, the strike and the spot. Because a long call gains as the stock rises and a short put loses as the stock falls, combining them removes the curved option behaviour and leaves a clean linear exposure. For the trader, the synthetic long behaves like buying the future: you make money when the stock goes up and lose money when it goes down, in roughly equal measure.

This page focuses on the synthetic long future on a real, liquid NSE stock so the numbers are concrete. We will use Reliance Industries, one of the most heavily traded names in the Indian futures and options segment, and walk through the exact premiums, the net debit, and the rupee profit and loss at several closing prices.

The Two Legs And The Net Debit Or Credit

Every synthetic long future has exactly two legs at the same strike. The first is a long call, which costs you a premium. The second is a short put, which pays you a premium. Your net debit or credit is simply the call premium paid minus the put premium received, multiplied by the lot size. This single number is what makes synthetic future math concrete, and it is exactly what the old version of this page left out.

At the money, the call and put premiums are usually close, so the net cost is small. If the call costs more than the put, you have paid a small net debit. If the put pays more than the call, you receive a small net credit. That net amount also tells you the synthetic future price, which is the strike plus the net debit per share. Your real breakeven on expiry is this synthetic future price, not the strike.

• Long call premium: the amount you pay, charged to your account on entry.
• Short put premium: the amount you receive, credited to your account on entry.
• Net debit (per share) = call premium minus put premium, when the call is more expensive.
• Net credit (per share) = put premium minus call premium, when the put is more expensive.
• Synthetic future price = strike + net debit per share (or strike minus net credit per share).

Worked Reliance Example With Real Premiums And Net Debit

Let us build a synthetic long future on Reliance Industries. Assume Reliance is trading at Rs 1,300 spot and we choose the monthly expiry. The NSE lot size for Reliance is 500 shares. We pick the at the money 1300 strike. The figures below are illustrative but in the realistic range for a near month at the money option on a stock at this level.

• Buy 1300 Call at premium Rs 38 per share. Cost = 38 x 500 = Rs 19,000 paid.
• Sell 1300 Put at premium Rs 30 per share. Credit = 30 x 500 = Rs 15,000 received.
• Net debit per share = 38 minus 30 = Rs 8.
• Net debit for the position = 8 x 500 = Rs 4,000 paid on entry.
• Synthetic future price (your true breakeven) = 1300 + 8 = Rs 1,308.

So you have paid a net debit of Rs 4,000 to create a position that now moves one for one with Reliance, just like holding one lot of the Reliance future. If Reliance is below 1,308 at expiry you lose, and above 1,308 you profit, before costs. Notice how different this is from the vague old example: we have a strike, two real premiums, a net debit in rupees, and a precise breakeven.

Now look at the profit and loss at expiry for several closing prices. The payoff at expiry is the lot size multiplied by the difference between the closing price and the strike, plus or minus the net premium. Because we paid a net debit of Rs 8 per share, we subtract Rs 8 per share from the raw strike based payoff. All figures are gross, before brokerage and taxes, which we add in the next section.

Read the table carefully. At a close of Rs 1,350, the call is worth Rs 50 per share and the put expires worthless, so the call leg gives 50 x 500 = Rs 25,000, and after subtracting the Rs 4,000 net debit you keep Rs 21,000. At a close of Rs 1,250, the call is worthless but you are short the put, which is now 50 in the money against you, so the put leg costs 50 x 500 = Rs 25,000, and adding the Rs 4,000 debit already paid gives a loss of Rs 29,000. This is the unlimited downside of any long future showing up in synthetic form.

Adding STT, Brokerage And The Real Cost

The gross numbers above are not what hits your bank account. In India, each option leg attracts its own Securities Transaction Tax. STT on options is charged at 0.1 percent on the sell side premium for options that are not exercised, and importantly, if an option is exercised it is charged STT at 0.125 percent on the intrinsic settlement value. This second rule matters a lot for synthetic futures because one leg is almost always in the money at expiry, so exercise STT can be a real cost if you let it expire instead of squaring off.

For our Reliance position, suppose you square off both legs in the market rather than letting them be exercised. STT then applies only on the premium of the option you sell at exit, plus the original sell side STT on the put you wrote at entry. On a few thousand rupees of premium, STT is a small number, often under Rs 100 across both legs. Brokerage on a discount broker is typically a flat Rs 20 per executed order, so four orders, two to enter and two to exit, cost about Rs 80. Add exchange transaction charges, SEBI turnover fees, stamp duty and 18 percent GST on the brokerage and exchange charges, and your all in cost is usually a few hundred rupees, not thousands.

• STT on options: 0.1 percent on sell side premium for normal trades; 0.125 percent on intrinsic value if the option is exercised at expiry.
• Brokerage: commonly a flat Rs 20 per order on discount brokers, so roughly Rs 80 for the four orders in a round trip.
• Exchange transaction charges, SEBI fees and stamp duty are small percentages of turnover.
• GST at 18 percent applies on brokerage plus exchange transaction charges.
• To avoid the higher exercise STT, square off both legs before expiry rather than letting an in the money leg get exercised.

How A Synthetic Future Differs From The Real Future

A synthetic long future and a real long Reliance future have nearly identical payoffs, but they are not the same instrument operationally. The real future is a single contract with one margin and one bid ask spread. The synthetic uses two option legs, so you pay two bid ask spreads and face execution risk if one leg fills and the other does not. On the other hand, the synthetic lets you choose any strike, which gives you flexibility the standard future does not have.

Margin is another difference. Because you are short a put, the synthetic long requires span and exposure margin similar to a short option or a future, not the small premium of a simple long option. Do not assume the synthetic is cheap to carry just because the net debit was only Rs 4,000. Your broker will block futures like margin against the short put leg, often a similar amount to carrying the actual future.

When Traders Actually Use Synthetic Futures

Synthetic futures are most useful when the synthetic is cheaper than the real future or when you want a strike the future cannot give you. If put call parity is temporarily out of line, the synthetic future price can sit slightly below or above the actual future, and an arbitrage desk will trade the cheaper one against the dearer one to lock a small risk free spread. Retail traders rarely chase this, but it is the textbook reason the two instruments stay glued together in price.

A second use is rolling a hedge or converting a position. Suppose you already hold a short put and the stock has moved your way; adding a long call at the same strike converts it into a synthetic long future, increasing your directional exposure without buying the future outright. A third use is in stocks where the future is illiquid but the options are active, letting you build futures like exposure from the more liquid options book.

• Arbitrage: trade the synthetic against the real future when put call parity drifts.
• Position conversion: turn an existing short put or long call into a full directional position.
• Liquidity: build futures like exposure where the option chain is more liquid than the future.
• Strike choice: take directional exposure anchored to a specific strike rather than the futures price.

Weekly And Monthly Expiry Mechanics

Both legs of a synthetic future must share the same expiry, otherwise the payoff is no longer a clean straight line. On the NSE, index options like Nifty have a weekly and a monthly expiry, while single stock options like Reliance settle on the monthly expiry only after SEBI phased out stock weekly contracts. So a Reliance synthetic future is naturally a monthly trade, expiring on the last Thursday of the month, or the previous trading day if that Thursday is a holiday.

Expiry day brings two practical points. First, single stock options are physically settled in India, meaning an in the money leg at expiry can lead to delivery of shares and a large delivery margin in the final days. For our Reliance synthetic, that means if you hold to expiry and the call is in the money, you could be obliged to take delivery of 500 shares, worth several lakh rupees. Most traders square off before expiry precisely to avoid this. Second, the higher exercise STT mentioned earlier is another reason to close out rather than letting a leg expire in the money.

Tax Treatment In India

For an active trader, profits and losses from a synthetic future, like all futures and options trading, are treated as business income under Indian tax law, not as capital gains. This means the Rs 21,000 profit in our favourable Reliance scenario would be added to your total income and taxed at your applicable slab rate, and any loss can generally be set off against other business income and carried forward, subject to filing your return on time and the usual conditions.

Because it is business income, the capital gains rates do not apply to your trading profit. Those rates, currently 20 percent for short term capital gains and 12.5 percent for long term gains above Rs 1.25 lakh, are relevant only if you actually take delivery of shares and later sell them as an investment, which is the opposite of how most synthetic future traders operate. Keep clean records of every leg, premium, brokerage and STT entry, because the tax department treats F&O as a business and may ask for the full trade book.

• Synthetic future trading profit is business income, taxed at your slab rate.
• Losses can be set off and carried forward as business losses, subject to timely filing.
• STCG at 20 percent and LTCG at 12.5 percent above Rs 1.25 lakh apply only to delivered shares held as investment, not to your F&O trading.
• Maintain a detailed trade book of premiums, STT and brokerage for assessment.

Common Mistakes To Avoid

The most common mistake is treating a synthetic long future as a limited risk options trade. It is not. The short put leg gives you the full unlimited downside of a long future, as our Rs 29,000 loss at a Reliance close of 1,250 showed. A second mistake is ignoring the net debit when judging breakeven, which leads traders to think they profit above the strike when in fact they only profit above the strike plus the net debit.

A third mistake is mismatched legs. If your call and put are on different strikes or different expiries, you no longer hold a synthetic future, you hold a different and often riskier structure. A fourth is forgetting margin: because of the short put, your broker blocks futures like margin, so the position ties up far more capital than the Rs 4,000 net debit suggests. Plan capital around the margin, not the premium.

• Do not treat it as low risk; the downside is unlimited like a real long future.
• Always add the net debit per share to the strike to find your true breakeven.
• Keep both legs on the same strike and same expiry or the payoff breaks.
• Budget for full futures like margin, not just the small net debit.

Sources And Further Reading

For authoritative data and current contract specifications, refer to NSE India, SEBI, Zerodha Varsity and the live NSE Option Chain. Lot sizes, STT rates and margin rules change from time to time, so always confirm the current Reliance lot size, premiums and tax rules on the official source before you place a real trade. All numbers on this page are illustrative and are not a promise of returns.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE India, SEBI (Securities and Exchange Board of India), Zerodha Varsity and NSE Option Chain. Always confirm current rules, rates and contract specifications on the official source before you trade.