Module 6 Option Strategies

Chapter 6

Synthetic Long & Arbitrage


6.1 – Background

Imagine a situation where you would be required to simultaneously establish a long and short position on Nifty Futures, expiring in the same series. How would you do this and more importantly why would you do this?

We will address both these questions in this chapter. To begin with let us understand how this can be done and later move ahead to understand why one would want to do this (if you are curious, arbitrage is the obvious answer).

Options as you may have realized by now, are highly versatile derivative instruments; you can use these instruments to create any kind of payoff structure including that of the futures (both long and short futures payoff).

In this chapter we will understand how we can artificially replicate a long futures pay off using options. However before we proceed, you may want to just review the long Future’s ‘linear’ payoff here

Alternatively, here is a quick overview –

Image 1_fut payoff

As you can see, the long futures position has been initiated at 2360, and at that point you neither make money nor lose money, hence the point at which you initiate the position becomes the breakeven point. You make a profit as the futures move higher than the breakeven point and you make a loss the lower the futures move below the breakeven point. The amount of profit you make for a 10 point up move is exactly the same as the amount of loss you’d make for a 10 point down move. Because of this linearity in payoff, the future is also called a linear instrument.

The idea with a Synthetic Long is to build a similar long Future’s payoff using options.

6.2 – Strategy Notes

Executing a Synthetic Long is fairly simple; all that one has to do is –

  1. Buy the ATM Call Option
  2. Sell the ATM Put Option

When you do this, you need to make sure –

  1. The options belong to the same underlying
  2. Belongs to the same expiry

Let us take an example to understand this better. Assume Nifty is at 7389, which would make 7400 the ATM strike. Synthetic Long would require us to go long on 7400 CE, the premium for this is Rs.107 and we would short the 7400 PE at 80.

The net cash outflow would be the difference between the two premiums i.e 107 – 80 = 27.

Let us consider a few market expiry scenarios –

Scenario 1 – Market expires at 7200 (below ATM)

At 7200, the 7400 CE would expire worthless, hence we would lose the premium paid i.e Rs.107/-. However the 7400 PE would have an intrinsic value, which can be calculated as follows –

Intrinsic value of Put Option = Max [Strike-Spot, 0]

= Max [7400 – 7200, 0]

=Max [200, 0]

= 200.

Clearly, since we are short on this option, we would lose money from the premium we have received. The loss would be –

80 – 200 = -120

Total payoff from the long Call and short Put position would be –

= -107 – 120

= -227

Scenario 2 – Market expires at 7400 (At ATM)

If the market expires exactly at 7400, both the options would expire worthless and hence –

  1. We lose the premium paid for the 7400 CE option i.e 107
  2. We get the retain the premium for the 7400 PE option i.e 80
  3. Net payoff from both the positions would be -27e 80 – 107

Do note, 27 also happens to be the net cash outflow of the strategy, which is also the difference between the two premiums

Scenario 3 – Market expires at 7427 (ATM + Difference between the two premiums)

7427 is an interesting level, this is the breakeven point for the strategy, where we neither make money nor lose money.

  1. 7400 CE – the option is ITM and has an intrinsic value of 27. However we have paid 107 as premium hence we experience a total loss of 80
  2. 7400 PE – the option would expire OTM, hence we get to retain the entire premium of 80.
  3. On one hand we make 80 and the other we lose 80. Hence we neither make nor lose any money, making 7427 the breakeven point for this strategy.

Scenario 4 – Market expires at 7600 (above ATM)

At 7600, the 7400 CE would have an intrinsic value of 200, we would make –

Intrinsic value – Premium

= 200 – 107

= 93

The 7400 PE would expire worthless; hence we get to retain the entire premium of Rs.80.

Total payoff from the strategy would be –

= 93 + 80

= 173

With the above 4 scenarios, we can conclude that the strategy makes money while the market moves higher and loses money while the market goes lower, similar to futures. However this still does not necessarily mean that the payoff is similar to that of futures. To establish that the synthetic long payoff behaves similar to futures, we need evaluate the payoff of the strategy with reference to the breakeven point; let’s say 200 point above and below the breakeven point. If the payoff is identical, then clearly there is linearity in the payoff, similar to futures.

So let’s figure this out.

We know the breakeven point for this is –

ATM + difference between the premiums

= 7400 + 27

= 7427

The payoff around this point should be symmetric. We will consider 7427 + 200 = 7627 and 7427-200 = 7227 for this.

At 7627 –

  1. The 7400 CE would have an intrinsic value of 227, hence we get to make 227 – 107 = 120
  2. The 7400 PE would expire worthless, hence we get to keep the entire premium of 80
  3. In all we experience a payoff of 120 + 80 = 200

At 7227 –

  1. The 7400 CE would not have any intrinsic value, hence we lose the entire premium paid i.e 107
  2. The 7400 PE would have an intrinsic value of 7400 – 7227 = 173, since we have received 80 as premium the net loss would be 80 – 173 = -93.
  3. In all we experience a payoff of -93-107 = -200

Clearly, there is payoff symmetry around the breakeven, and for this reason, the Synthetic Long mimics the payoff of the long futures instrument.

Further, here is the payoff at various expiry levels –

Image 2_different payoff

And when you plot the Net Payoff, we get the payoff structure which is similar to the long call futures.

Image 3_payoff

Having figured out how to set up a Synthetic long, we need to figure out the typical circumstances under which setting up a synthetic long is required.

6.3 – The Fish market Arbitrage

I’ll assume that you have a basic understanding on Arbitrage. In easy words, arbitrage is an opportunity to buy goods/asset in a cheaper market and sell the same in expensive markets and pocket the difference in prices. If executed well, arbitrage trades are almost risk free. Let me attempt to give you a simple example of an arbitrage opportunity.

Assume you live by a coastal city with abundant supply of fresh sea fish, hence the rate at which fish is sold in your city is very low, let’s say Rs.100 per Kg. The neighboring city which is 125 kms away has a huge demand for the same fresh sea fish. However, in this neighboring city the same fish is sold at Rs.150 per Kg.

Given this if you can manage to buy the fish from your city at Rs.100 and manage to sell the same in the neighboring city at Rs.150, then in process you clearly get to pocket the price differential i.e Rs.50. Maybe you will have to account for transportation and other logistics, and instead of Rs.50, you get to keep Rs.30/- per Kg. This is still a beautiful deal and this is a typical arbitrage in the fish market!


It looks perfect, think about it – if you can do this everyday i.e buy fish from your city at Rs.100 and sell in the neighboring city at Rs.150, adjust Rs.20 towards expenses then Rs.30 per KG is guaranteed risk free profit.

This is indeed risk free, provides nothing changes. But if things change, so will your profitability, let me list few things that could change –

  1. No Fish (opportunity risk) – Assume one day you go to the market to buy fish at Rs.100, and you realize there is no fish in the market. Then you have no opportunity to make Rs.30/-.
  2. No Buyers (liquidity risk) – You buy the fish at Rs.100 and go to the neighboring town to sell the same at Rs.150, but you realize that there are no buyers. You are left holding a bag full of dead fish, literally worthless!
  3. Bad bargaining (execution risk) – The entire arbitrage opportunity hinges upon the fact that you can ‘always’ bargain to buy at Rs.100 and sell at Rs.150. What if on a bad day you happen to buy at 110 and sell at 140? You still have to pay 20 for transport, this means instead of the regular 30 Rupees profit you get to make only 10 Rupees, and if this continues, then the arbitrage opportunity would become less attractive and you may not want to do this at all.
  4. Transport becomes expensive (cost of transaction) – This is another crucial factor for the profitability of the arbitrage trade. Imagine if the cost of transportation increases from Rs.20 to Rs.30? Clearly the arbitrage opportunity starts looking less attractive as the cost of execution goes higher and higher. Cost of transaction is a critical factor that makes or breaks an arbitrage opportunity
  5. Competition kicks in (who can drop lower?) – Given that the world is inherently competitive you are likely to attract some competition who would also like to make that risk free Rs.30. Now imagine this –
    1. So far you are the only one doing this trade i.e buy fish at Rs.100 and sell at Rs.150
    2. Your friend notices you are making a risk free profit, and he now wants to copy you. You can’t really prevent his as this is a free market.
    3. Both of you buy at Rs.100, transport it at Rs.20, and attempt to sell it in the neighboring town
    4. A potential buyer walks in, sees there is a new seller, selling the same quality of fish. Who between the two of you is likely to sell the fish to the buyer?
    5. Clearly given the fish is of the same quality the buyer will buy it from the one selling the fish at a cheaper rate. Assume you want to acquire the client, and therefore drop the price to Rs.145/-
    6. Next day your friend also drops the price, and offers to sell fish at Rs.140 per KG, and therefore igniting a price war. In the whole process the price keeps dropping and the arbitrage opportunity just evaporates.
    7. How low can the price drop? Obviously it can drop to Rs.120 (cost of buying fish plus transport). Beyond 120, it does not makes sense to run the business
    8. Eventually in a perfectly competitive world, competition kicks in and arbitrage opportunity just ceases to exist. In this case, the cost of fish in neighboring town would drop to Rs.120 or a price point in that vicinity.

I hope the above discussion gave you a quick overview on arbitrage. In fact we can define any arbitrage opportunity in terms of a simple mathematical expression, for example with respect to the fish example, here is the mathematical equation –

[Cost of selling fish in town B – Cost of buying fish in town A] = 20

If there is an imbalance in the above equation, then we essentially have an arbitrage opportunity. In all types of markets – fish market, agri market, currency market, and stock market such arbitrage opportunities exist and they are all governed by simple arithmetic equations.

6.4 – The Options arbitrage

Arbitrage opportunities exist in almost every market, one needs to be a keen observer of the market to spot it and profit from it. Typically stock market based arbitrage opportunities allow you to lock in a certain profit (small but guaranteed) and carry this profit irrespective of which direction the market moves. For this reason arbitrage trades are quite a favorite with risk intolerant traders.

I would like to discuss a simple arbitrage case here, the roots of which lie in the concept of ‘Put Call Parity’. I will skip discussing the Put Call Parity theory but would instead jump to illustrate one of its applications.

However I’d suggest you watch this beautiful video from Khan Academy to understand the Put Call Parity –

So based on Put Call Parity, here is an arbitrage equation –

Long Synthetic long + Short Futures = 0

You can elaborate this to –

Long ATM Call + Short ATM Put + Short Futures = 0

The equation states that the P&L upon expiry by virtue of holding a long synthetic long and short future should be zero. Why should this position result in a zero P&L, well the answer to this is attributable to the Put Call Parity.

However, if the P&L is a non zero value, then we have an arbitrage opportunity.

Here is an example that will help you understand this well.

Image 4_Nifty Fut

On 21st Jan, Nifty spot was at 7304, and the Nifty Futures was trading at 7316.

Image 5_Syn Call

The 7300 CE and PE (ATM options) were trading at 79.5 and 73.85 respectively. Do note, all the contracts belong to the January 2016 series.

Going by the arbitrage equation stated above, if one were to execute the trade, the positions would be –

  1. Long 7300 CE @ 79.5
  2. Short 7300 PE @ 73.85
  3. Short Nifty futures @ 7316

Do note, the first two positions together form a long synthetic long. Now as per the arbitrage equation, upon expiry the positions should result in a zero P&L.  Let’s evaluate if this holds true.

Scenario 1 – Expiry at 7200

  • The 7300 CE would expire worthless, hence we lose the premium paid i.e 79.5
  • The 7300 PE would have an intrinsic value of 100, but since we are short at 73.85, the net payoff would be 73.85 – 100 = -26.15
  • We are short on futures at 7316, which would result in a profit of 116 points (7316 – 7200)
  • Net payoff would be -79.5 – 26.15 + 116 = +10.35

Clearly, instead of a 0 payoff, we are experiencing a positive non zero P&L.

Scenario 2 – Expiry at 7300

  • The 7300 CE would expire worthless, hence we lose the premium paid i.e 79.5
  • The 7300 PE would expire worthless, hence we get to retain 73.85
  • We are short on futures at 7316, which would result in a profit of 16 points (7316 – 7300)
  • Net payoff would be -79.5 +73.85+16 = +10.35

Scenario 3 – Expiry at 7400

  • The 7300 CE would have an intrinsic value of 100, and therefore the payoff would be 100 – 79.5 = 20.5
  • The 7300 PE would expire worthless, hence we get to retain 73.85
  • We are short on futures at 7316, which would result in loss of 84 points (7316 – 7400)
  • Net payoff would be 20.5 + 73.85 – 84 = +10.35

You could test this across any expiry value (in other words the markets can move in any direction) but you are likely to pocket 10.35 points, upon expiry. I’d like to stress this again; this arbitrage lets you make 10.35, upon expiry.

Here is the payoff structure at different expiry values –

Image 6_Arb payoff

Interesting isn’t it? But what’s the catch you may ask?

Transaction charges!

One has to account for the cost of execution of this trade and figure out if it still makes sense to take up the trade. Consider this –

  • Brokerage – if you are trading with a traditional broker, then you will be charged on a percentage basis which will eat away your profits. So on one hand you make 10 points, but you may end up paying 8 – 10 points as brokerage. However if you were to do this trade with a discount broker like Zerodha, your breakeven on this trade would be around 4-5 points. This should give you more reason to open your account with Zerodha ☺
  • STT – Do remember the P&L is realised upon expiry; hence you would have to carry forward your positions to expiry. If you are long on an ITM option (which you will be) then upon expiry you will have to pay a hefty STT, which will further eat away your profits. Please do read this to know more.
  • Other applicable taxes – Besides you also have to account for service tax, stamp duty etc

So considering these costs, the efforts to carry an arbitrage trade for 10 points may not make sense. But it certainly would, if the payoff was something better, maybe like 15 or 20 points. With 15 or 20 points you can even maneuver the STT trap by squaring off the positions just before expiry – although it will shave off a few points.

Key takeaways from this chapter

  1. You can use options to replicate futures payoff
  2. A synthetic long replicates the long futures payoff
  3. Simultaneously buying ATM call and selling ATM Put creates a synthetic long
  4. The breakeven point for the synthetic long is the ATM strike + net premium paid
  5. An arbitrage opportunity is created when Synthetic long + short futures yields a positive non zero P&L upon expiry
  6. Execute the arbitrage trade only if the P&L upon expiry makes sense after accounting for expenses.


Download Synthetic Long & Arbitrage Excel Sheet


  1. Mahesh says:

    it look very nice stratergy . but can you explain when is the right condition to enter the trade… what are the parameter i need to consider before entering this trade???

    • Karthik Rangappa says:

      Mahesh, you spot it execute it!. There is nothing like an ideal condition for this strategy.

      • Mahesh says:

        thank you sir 🙂

      • S.K.Ahuja says:

        your assumption that at 7389 nifty future and at the value of 7400PE @ Rs.80, the 7400CE can not be 127 Rs. It will be practically 69 Rs. You are calculating profit/loss at various levels of nifty expiry. In scenario one you are calculating 227 as loss. whereas in case of future the loss would be 189. In scenario 2 you are calculating 27 as loss. whereas in case of future the profit should be of Rs. 11. In scenario 3 you are calculating 0 as profit/loss. whereas in case of future the profit would be 38 . In scenario 4 you are calculating 173 as profit whereas in case of future the profit would be 211.
        So in case of synthetic future strategy the P/L is always the same wherever the nifty expires. I would like to take note of the same and revert back if I am mistaken. Thanks.

        • Karthik Rangappa says:

          Why do you think the CE would not be 127 and why 69 specifically? Do remember that the payoff structure of synthetic long is similar to futurs @ it’s breakeven point. I would suggest you download the excel and work around with the numbers to get more clarity.

          • S.K.AHUJA says:

            Very poor Mr. KARTHIK RANGAPPA, Shame on the Zerodha Varsity. Can you show me any trading screen any time in the history of stock market or in future, when NIFTY FUTURES trading AT 7389, the rate of the 7400CE to be 127 and 7400PE to be 69. YOU FORGOT THE FORMULA THAT PUT PREMIUM OF ANY STRIKE + NIFTY FUTURES MUST BE EQUAL TO THE STRIKE PRICE +CALL PREMIUM. Wherever any mismatch is there the arbitration opportunity arises and immediately encashed by some trader.

          • Karthik Rangappa says:

            I’d suggest you download the excel once and look into the values once before concluding things. Thanks.

  2. Avinash says:

    with 0% risk can we earn profit in option?

  3. Khyati Verdhan says:

    Hi kartik
    If nifty call option has premium rs.1 then how much money required to short one lot

    • Karthik Rangappa says:

      Margins for writing options is usually same as that of the margins required for futures. The premium value is not really considered.

  4. k l agarwal client id.. RK0987 says:

    what is fun for a gain of 10 to 20 rupees by investing margin of 2 lot ie 1 for future sale and 1 for put sell.appx about 90000 to 1 lacs.

    • Karthik Rangappa says:

      Well, a lot of professional traders like to take up trades where there is complete visibility on the downside risk even though the reward is limited.

  5. rohan says:

    when option strategy module will be available in pdf format like other modules are available?
    how many more chapters are left?

  6. Khyati Verdhan says:

    Hi kartik
    Very very thank to you for clearing my doubts about option selling.
    Clearly it make sense to buy option when premium is less and to write option when premium is high

  7. Surya says:

    Few minor corrections in the uploaded excel sheet.

    In the tab “Strategy”
    Cell C7 mentioning as “Short PUT (OTM)” i think it need to be “Short PUT (ATM)”
    Cell G15 mentioning as “PE_IV (OTM)” i think it need to be “PE_IV (ATM)”
    Cell C37 mentioned as “LS – IV (ITM)” it has to be “CE_IV (ATM)” with proper definition on cell D37
    Cell C39 mentioned as “HS_IV” it has to be “PE_IV (ATM)” with proper definition on cell D39

    In tab “Synthetic Call with Futures”
    Cell C11 mentioning as “Long Futures” it has to be “Short Futures”
    Cell G15 mentioning as “PE_IV (OTM)” i think it need to be “PE_IV (ATM)”
    Cell C37 mentioned as “LS – IV (ITM)” it has to be “CE_IV (ATM)” with proper definition on cell D37
    Cell C39 mentioned as “HS_IV” it has to be “PE_IV (ATM)” with proper definition on cell D39

  8. Vipul Karde says:

    Sir, isnt calender spread a sort of arbitrage then.. we spot the mispricing of 2 different expiry dates.. sell current month expiry and buy far month..?

  9. Khyati Verdhan says:

    Hi kartik
    Since margin required for option selling is same as that of futures and not on premium. So, selecting which strike price yields maximum profit for option seller, whether it is deep otm, otm, ATM, itm or deep itm ??????

    • Karthik Rangappa says:

      The further you move away from ATM, the higher is your safety and lower is the profits. It is upto you to identify a sweet spot and write that option. I’d suggest you use the Normal Distribution technique to identify the strikes.

    • S.K.Ahuja says:

      The margin for selling options differs from strike yo strike. It reduces as go out from deep ITM to ATM and OTM and Far OTM.

  10. R P HANS says:

    Sir, What is the advantage of only synthetic long? by this we are taking loss and profit both unlimited. Just long call is having unlimited profit and limited loss. I think it is advisable to use with short future to get advantage of arbitrage as you’ve explained?
    Secondly, to maximise the profit the difference between strike price and future price shall be more and difference in the premium of the CE AND PE shall be minimum. (future price-strike price -(ce premium- pe premium) = 7316-7300 – (79.5-73.85) = 16 – 5.65 = 10.35)
    So it means when the future price is at the middle of two strike price them the return may be maximum. pl. correct.


    • Karthik Rangappa says:

      On its own the Synthetic Long is just like futures. But you can use this to identify and structure an arbitrage trade (as explained in the chapter). The calculation you’ve shown is somewhat similar…leads to the identification of max P&L.

  11. Khyati Verdhan says:

    Hi kartik
    Appropriately, almost for all nifty options the premium was roughly rs.35000. So in a trend please suggest me whether it is wiseful to write a deep itm option and collecting big premium in single trade or
    Selling atm option for every 100 fall then exiting position and writing next ATM option and then exiting and so on doing when the trade lasts
    Or whether premium declines more fast in otm or deep otm

    Please give me most profitable way of trading option

    • Karthik Rangappa says:

      See unfortunately there is no 1 strategy that suits all, everyone has different risk reward perspective and hence what works for me will never work for you or vice versa. Trading requires a lot of experimentation, I’d suggest you keep this experimentation with small amounts of money that you can afford to lose.

  12. Happy says:

    Please guide. Taking real market example.
    4 Feb close
    IDBI Spot rate is 55.90
    Feb future 5.2% discount 52.9
    March future 8.9% discount 50.85

    what If I buy March fut @ 50.85 and immediately sell Feb Future @ 52.90
    so untill expiry day of feb I am safe.. No profit or loss can covered both short and long side..
    But what will happen on expiry day ?
    As feb expiry has to happen with the spot rate which is way higher than feb future ?

    What strategy Can I use to shift on expiry day and pocket the difference between these two futures..?

    Pls guide. Need to understand what’s happening here ..

    • Karthik Rangappa says:

      On the day of expiry in Feb, the spot and Feb futures will converge to a single point, this does not guarantee the convergence of March futures, so this is a bit tricky. I’d suggest you wait for sometime, I will be discussing Calendar spreads and the technique to do this in sometime.

  13. pravin says:

    sir can we select an ITM strike for an arbitrage trade ……???

  14. lakshmi says:

    Is there any automated software that can let me know the arbitrage opportunity live. Because EOD prices may or may not be relevant on the following day. If available what will be the approximate cost. Or any info about who sells such software. Using Excel and nseindia will not be of much use because the prices are too delayed.

  15. narsimha says:

    sir,whats this kite is different from zerodha trade which we r currently using in our mobiles if its different&advanced how can we use in mobiles pls clarify mydoubt

  16. Khyati Verdhan says:

    Hi kartik
    Very very thanks for clearing my doubts on option writing.
    I have send friend request to you on Facebook. I am glad if you accept.

  17. Khyati Verdhan says:

    Hi kartik,
    Since I learn in futures module, in future MTM position closes daily and broker buys next day.
    So in future can we get benefits of gap up or gap down , since we get such benefits in option world.

  18. Khyati Verdhan says:

    This means I we are trading in future we cannot get benefit of gap up/ gap down????

    • Karthik Rangappa says:

      Gap up or down is a directional aspect, you will get benefit of this. In futures you will experience it via MTM and in options the Delta will do the trick for you.

  19. Khyati Verdhan says:

    Hi kartik,
    If I sell nifty future at 7500 on Monday and on Tuesday market opens at 7400 and on opening I close my position. Then can I get benefit of rs.100. I.e 100*75=7500 per lot???????

  20. Swapnil Kulkarni says:

    Mr. Karthik, I have read almost all your modules and no doubt you are doing excellent by explaining in & outs of stock market in details. I really appreciate your efforts. But I have one doubt. In arbitrage set up, Scenario 1: Nifty expired 7200. Means nifty spot 7200. You considered we short Nifty futures at 7316 when Nifty spot was 7304, means there is 12 points difference in Futures price. When you considered nifty closed at 7200 then you subtracted Nifty spot price i.e. 7316-7200=116??. But when spot is at 7200 futures must be at 10 to 12 points more. Considering Nifty futures 10 points more, the final equation for P/L will become like this -79.5 – 26.15 + (116-10) = 0.35. Which looks worthless. Please guide if I am thinking wrong. Thanks.

    • Karthik Rangappa says:

      Thanks Swapnil.

      Upon expiry, the spot price and futures price will always converge, hence the arbitrage works 🙂


    Sir, Whats wrong if I opt far OTM synthetic call with future ? Say Current Yes Bank Future is 1157 & 1200 strike CE AND PE IS 7.2 AND 54.5 RESPECTIVELY. here Long Synthetic long + Short Futures = 54.5-7.2-43=4.3. . Is it not offering any arbitrage opportunity? You talked with only ATM in this regard.Please Explain Sir…..

    • Karthik Rangappa says:

      The trick is to make sure you are completely hedged out of the deltas when you initiate the position. With ATMs the call delta negate the put deltas. But with OTM it will not.

  22. Manoj Chandhok says:

    Hello, thanks for explaining these strategies in such a simple way. Just have a query on arbitrage – Since BankNifty has a weekly options contract so going by today’s date i.e. 11th Aug 2016, BankNifty 11th Aug will be expired today. Suppose as per your strategy I buy a lot of CE at strike price of 18600 (ATM) and sell a lot of PE at the same strike price and also short BankNifty futures at current price. Now future is going to expire on 25th Aug so if i execute the above trades, options will be expired today but if i square off my future trade also is it going to give me the same result? Hope my question is clear to you 🙂

  23. Krishna.K says:

    Hi Karthik, a small doubt,
    will the pay off be the same if we do the reverse of this strategy like (synthetic short + long futures)
    where as synthetic short= short CE &long PE. IS THIS POSSIBLE??. correct me if i am wrong.

    • Karthik Rangappa says:

      Yes, absolutely. The payoff will be there as long as there is an arbitrage opportunity. Synthetic long = Long CE + Short PE. Synthetic Short = Long PE+ Short CE

  24. Jitendra Ashtekar says:

    Dear Sir, If I sell next series future and buy this series future. can I keep premium difference at expiry. What are drawbacks in this strategy.

  25. Abhishek says:

    Hi Sir,

    1) If by using option strategies my net payoff is 0 or -ve, would then also STT charges be applicable?
    2) Are the STT charges same in case of futures ?

  26. Sameer says:

    Does this strategy only work upon expiry….what if we decide to square off before expiry?

  27. Nitesh Kumar says:

    Dear Zerodha,

    Please explain iron butterfly and condor with example. I am not able to find anything on varisty, however its has been mentioned in orientation that we will explain.


    Nitesh Kumar

  28. Mohit Khandelwal says:

    Hello Sir

    These are the last lines in the above chapters.
    “So considering these costs, the efforts to carry an arbitrage trade for 10 points may not make sense. But it certainly would, if the payoff was something better, maybe like 15 or 20 points. With 15 or 20 points you can even maneuver the STT trap by squaring off the positions just before expiry – although it will shave off a few points”

    For options we can exit by buying back the sold share or selling the already bought share just before few minutes of the expiry to get off the STT trap but however how can we exit from the futures contract? As it will end on the expiry day itself. So what I understood by your words “although it will shave off a few points” is because of the futures contract we cannot alter/change/modify/exit. Is my understanding in both the points right? Please clarify.
    Thank You

  29. rajesh.katariya89 says:

    Today I stimulated arbitrage in nifty and as per excel sheet it is showing 19.4 as pay off then what will be the total amount of profit after costs considering m a zerodha client brokerage

  30. kaushik says:

    can you help to make exel sheet for USDINR OPTION

  31. SAMIR says:

    Dear Karthik,
    Is there any way I can buy and/or sell more than one CE or PE at the same time using Kite Web or Kite Android? e.g. buy one ATM Call, sell one ATM put and sell one future in a single order or do I have to do it one after the other?
    Thanks and regards,

  32. shafik s says:

    Dear Nitin sir,
    is it a good strategy to long future of nifty and sell corresponding call and vice versa as strategy equivalent to stock backed call or will it be naked risky to do so.

    Regards and thanks,
    shafik s

  33. Satyam says:

    An ITM option will always expire at a price lesser than the intrinsic value. So arbitrage won’t work.

  34. Sashidhar. L says:

    Sir is it possible to create an arbitrage opportunity by entering into Call, Put and Futures at different points of time? For example, the option prices are always high in beginning of contract so short the put option then, and as time passes, buy call option and futures at a lower price? Would that be possible? I know that it is not possible to predict option movements, but what do you think of this sir?
    Thanks in advance.

    • Karthik Rangappa says:

      Yes, in fact, there is something called as a box strategy, involving 4 option legs which mimic 2 futures trades. Sort of an arbitrage, do check it out.

      • Sashidhar. L says:

        First of all, thanks for the reply sir. From what I understand, it is possible to create an Arbitrage opportunity and that the box trading system is a limited and risk free profit strategy. May I ask, what are some others strategies like this one, or which book deals with them?

        • Karthik Rangappa says:

          Yes, the risk in box is execution risk. Assuming you execute the trade at the right prices, you can capture the risk-free profit. I’d suggest you take a look at Option pricing and Volatility by Sheldon Natenburg

          • Sashidhar. L says:

            Sir that was a fascinating book and thanks for the recommendation. I have two questions 1.Have ever executed the box strategy and what can you say about that? 2. If we manage to convert it into an automated trading system, it would be like you said, a money machine, or am I missing something?

          • Karthik Rangappa says:

            Well, automation needs exchange approvals 🙂

          • Sashidhar. L says:

            Sir thank you so much for pointing me toward option volatility and pricing, it was a treasure. I have developed a trading system based on Box strategy. However, I have not done this before and am having problems with backtesting the same. What do you suggest I do now? Thanks in advance.

          • Karthik Rangappa says:

            Backtesting is essential, otherwise, it’s like driving a brand new car, without knowing where the gearbox or breaks are. So do backtest or at least get an insight into its behavior. In the worst case, take it live, with small quantities and scale it over time.

  35. Pradeep says:

    Sir about Box Spreads. Have you ever been able to successfully execute it? Also, can you give me some pointers regarding the execution of Box strategy and other such Execution risk involved arbitrage strategies?

    • Karthik Rangappa says:

      Yes, I’ve done that couple of times. Very cumbersome since it involves 4 legs. A lot of execution risk as well.

  36. Surya says:

    I am a great fan of Karthik Rangappa and Varsity. Tried to create a google excel sheet which will get automatically update every 1 hour to find these kinds of opportunity. If interested people can refer to for more information.

  37. Amit says:

    Hi Karthik,

    When will I be able to earn profit as per showing in excel. let’s say I calculated current spread and it is 20 rs. and I opened a position. So when will I earn this? Do I need to keep this position open till expiry to earn Rs. 20 profit ? And what would be profit/loss on expiry day? Is it difference of spread on expiry day while closing position or 20 Rs. flat on expiry ?

  38. Yash says:

    Can you clarify between arbitrage, hedgin and jobing?

    • Karthik Rangappa says:

      Arbitrage involves buying and selling the same asset simultaneously across two different markets, with an intention to make a risk free or relatively low-risk profit.
      Hedging is when you want to protect your Portfolio or position’s P&L against adverse market movement. You don’t expect to make a profit or loss when you hedge, more on this here –
      Jobbing is when you buy and sell large quantities of shares for a quick profit, this is done on an intraday basis.

      • Yash says:

        You buy call and either sell fut or sell equity ,is there any possibility to price difference and grab it ,is it arbitraging or not?………..And what is a future scope of arbitrage opportunity if algo software comes in picture and technology improve

        • Karthik Rangappa says:

          It is a sort of an arbitrage if you Buy spot and sell Fut. I think the abr opportunities (especially the ones which involves fast information flow) is kind of diminishing simply because systems are getting faster and faster shrinking the opportunity universe.

  39. Hina says:

    Sir, why would someone like to have a futures payoff instead of buying simply a call option ; at least in the latter case the loss will be limited to the premium ?

    • Karthik Rangappa says:

      True, but option P&L is dependent on many other variables like market direction, volatility, time, speed, etc. In contrast, futures payoff is directly related to the directional movement in the market.

  40. Prakul says:

    Dear Sir,

    (1) Is there any strategy for trading futures with options? (except buy 1 fut & buy 2 PE ,etc)
    (2) What are the 4 legs of box strategy?


    • Karthik Rangappa says:

      1) You can combine futures in many ways, really depends on what you are looking at
      2) Buy Call, sell put of one strike and sell call and buy put of the next strike is a 4 leg box.

  41. Dipesh Kate says:

    Dish TV cash market share buy purchase = 74.75 of 7000 shares

    FUT Jun contract sell 75.35

    If I closed both positions on expiry of june….then what will be my profit loss?

  42. Hina says:

    Sir, how’s a discount broker different than other brokers ?

    • Karthik Rangappa says:

      By definition, a discount broker offers deep discount on execution services whereas a full-service broker offers research and higher brokerage. As you may know, Zerodha was the first broker in the country to introduce discount broking. Since then we have moved away from just a deep discount platform to a more advanced tech platform. We have many other services including Varsity which is given out to clients.

  43. Sumit says:

    Hi Karthik, I tried to implement synthetic long arbitrage on nifty as of today using the template shared and net pay off was -0.05. Does that mean there is no arbitrage exists as of now in the market to implement this strategy or is there any error in my feeding the data into the excel?

    Input Data
    Synthetic Call with Future
    Particular Value
    Underlying Nifty
    Spot Price 10767.65
    Long Call (ATM) 10750
    Short PUT (ATM) 10750
    Long Call Debit for Long Call 106.05
    Debit for Short Put 118
    Net Premium 11.95
    Short Futures 10738

    Net payoff was -0.05 for strike from 10000 – 11700

  44. Sadha says:

    Hi Karthick,

    How to back test an option strategy? How we can get price data for historically expired options?
    I am looking to back test IRON Condor Strategy.

    • Karthik Rangappa says:

      Backtesting options is a little tricky, Sadha. You will have to download the data from the bhav copy here –

      • Sadha says:

        Hi Karthick,

        Thanks for your answers on option back testing.
        I checked the nse bhav copy and that is of little help in what I need to do.

        I like to back test and understand how the how the 3 strikes away OTM options loss its value when it reaches near expiry, in the bhav copy we can get only the BANK Nifty data but not the OTM option price data, Do you have any idea of how to identify the option price? For Example , Now I need to get the Price of CE 26800 of May 31st Expiry when it was trading on May 24 EOD, Like that, any help? Also you have mentioned Option Back Testing is little tricky, If you could provide a chapter or advice in OPtion back testing it would be great help and learning.

      • SadhaSivam S says:

        Karthik,. Do you have any chapters for back testing? Expecially back testing option strategies.

  45. Rajan says:

    hii karthik,
    can you tell me the approx margin requirement for the Synthetic Long & Arbitrage trade that you have demonstrated above?

  46. Gaurav says:

    Sir , if future is in discount then short synthetic call and long future.. is it work???

  47. Pritam says:

    sir before expiry means day before expiry or you mean to say before end of the expiry??

  48. Pritam says:

    sir what is the prolem if we take slightly OTM strike rather than ATM. Anyone’s help would be appreciated.

  49. SadhaSivam S says:

    Hi, karthi,

    I just don’t understand why the nifty puts at strike 3000, 4000 and 5000 are traded now.
    If the buyer may hope for a fall,. But the seller is getting only around 1 rupees as premium which will be obviously very less than the normal interest rate for their margin. Why the sellers want to take this risk and sell it. Am I missing something?

  50. SadhaSivam S says:

    Hi,. Karthi,. Have you heard about weirdor or jeep options strategy. Do you think it is a good strategy??

  51. Himanshu says:

    Hi Karthik, can we use any strike of Call & Put (ATM, ITM or Deep ITM etc.) as long as strike is same for both call & put? Since after all, spot price moves out of the equation on expiry.

    • Karthik Rangappa says:

      Sorry Himanshu, I need a little more clarity on your query. Can you please elaborate the query, thanks?

      • Himanshu says:

        Hi Karthik. Since you wrote in above lesson to choose ATM strikes for put call parity arbitrage, I want to ask if we can choose any other strike like OTM, deep OTM or deep ITM for the put call parity arbitrage?

  52. Himansu says:

    Dear Sir,
    Can this strategy be used on intraday basis?

  53. Parag says:

    Hello Karthik,
    how is margin calculated for the artibtrage trade using Long Synthetic long + Short Futures. The margin caculated togehter on all 3 trades or seperate margin is needed for each trade.
    Simply does margin reduce as there is lesser risk in such a trade. I am using zerodha Kite.

    Parag Joshi

  54. Neehar says:

    Hi Karthik, In futures you have demonstrated calendar spreads. Is it possible to perform such kind of strategies in options as well? for example, Assuming that IV s of May ATM options continue to increase up to the declaration of election results and assuming that IVs of APR ATM options will be more range bound between 13-15 up to expiry and knowing that the theta of Apr series is much higher than that of May series, is it possible to buy and ATM option of May series and sell an ATM option of Apr series.Its a perfect delta neutral strategy playing only on theta and vega. if such a strategy is meaningful, then how would the P&L diagram of the strategy look like and how would the strategy behave in the case of puts and in the case of calls?

  55. Rishank Pandey says:

    A) Sir, is Arbitrage still working?
    B) If incase i have a capital of Rs 10 lacs, can i get the Arbitrage benefits by earning 2-3% every month assuming (a) i select a particular stock on the start of the month the future of which trading approx 3% higher than spot price, (b) buying in cash and selling in future with same quantity, (c) Squaring both the positions on expiry i.e. last Thursday of the month.
    C) Does convergence always happens at the expiry i.e. spot=future
    D) What, if in the middle of the month stock rises to 20%, do i need to have an extra margin or the margin which was provided by Zerodha at the time of selling future will hold good till the expiry.

  56. Maheswaran R says:

    HI Karthick,

    What is the spread value in negative as per you excel, can i still go and execute the trade?

    • Karthik Rangappa says:

      Yeah, you will have to pay attention to the long and short side of the trade.

      • Maheswaran R says:

        I need bit clarity and let’s talk with an example
        Ref. data below as per your excel

        Stock: INDIANB
        Spot : 227
        Long Call (ATM): 220
        Short PUT (ATM): 220
        Long Call Debit for Long Call: 56
        Debit for Short Put: 5
        Net Premium: -51
        Short Futures: 227
        Spread: (-44)

        here as per my understanding i need to execute the trade as below

        1. Buy CE @ 56
        2. Sell PE @ 5
        3. Sell INDIANB Future @ 227

        In this case if i execute the trade i will gaining profit of Rs 44 on expiry or Loss?

        • Karthik Rangappa says:

          On the option leg, you are long and you are short on the futures leg. Technically you are supposed to make the spread. The spread is 227 – 220 = 7. Not sure how you arrived at -44. I’d suggest you use the excel sheet to see the overall payoff. Good luck!

          • Maheswaran R says:

            Thanks Karthik for you prompt reply,

            -44 is Spread output by your excel formula only (i didn’t arrived my own)

            Spread = (Short future – Strike Price) + Net Premium
            Spread = (227-220)-51
            Spread = -44

            I confused again whether anything to be changed in excel calculation

          • Karthik Rangappa says:

            Let me check this and get back to you again. Thanks.

  57. Nikhil Deo says:

    Hi Karthik
    In cases of weekly option expiry date, rather than the last thursday expiry, Will the Cost of Carry for Futures contract impact my Arbitrage profit? (Nifty or Bank Nifty)
    In your example scenario and/or calculation excel, I assume in the example scenario, Options & Futures both have same expiry date.
    But I was thinking, if I try this somewhere in the middle of the month, by squaring all positions, what will happen? Will I actually be able to book the profit as per computations? Or do we need to factor in any other parameter? (Cost of carry)

    • Karthik Rangappa says:

      No, the actual profits may not match the excel, as the assumption is that you’d hold to expiry. However, this should not restrict you from closing the position earlier. You can close it earlier if you think the opportunity is right.

  58. Nikhil Deo says:

    Hi Karthik
    Request you to please upload the Payoff Computation Excel sheet for “Synthetic Short + Long Futures”.
    I have done it, but will be great if you can also share the same, so that I can validate my calculations.


  59. Kavita says:

    Sir is there any way by which we can get atleast 2 or 3 points arbitrage everyday ?? Like taking multiple positions in options like buying/selling calls/puts or maybe mixing futures with them if needed.

  60. Manas Pandey says:

    Sir, is stt completely removed now ??

  61. Kavita says:

    Ok sir.
    Can you please tell some stocks which are very liquid in options

    • Karthik Rangappa says:

      Nifty index contract is the most liquid, Kavita. Apart from that, SBIN, TCS, RIL, Tata Motors etc have decent liquidity.

  62. Nikhil Deo says:

    Hi Karthik
    Under the key takeaway section you have shared Payoff Computation Excel sheet for Arbitrage opportunity using a “Synthetic Long + Short Futures”.

    Request you to please upload the Payoff Computation Excel sheet for “Synthetic Short + Long Futures”.
    I have done it, but will be great if you can also share the same, so that I can validate my calculations.


  63. Abhishek Kuckreja says:

    Hi, sir I wanted to ask that are there any restrictions on the quantity of arbitrage like this, assuming there are unlimited opportunities (I know which is not possible in reality)? But still I wanted to know.

  64. Rajkumar S says:

    Hi Karthik,
    I am trying to execute the Synthetic Long & Arbitrage strategy for the currently ongoing Nifty AUG Options & Futures.
    I downloaded your excel sheet available at

    Underlying Nifty
    Spot Price (NIFTY 50) 11029
    Long Call (ATM) (NIFTY AUG 11000 CE) 11050
    Short PUT (ATM) (NIFTY AUG 11000 PE) 11050
    Long Call Debit for Long Call 144.6
    Debit for Short Put 129.55
    Net Premium -15.05
    Short Futures (NIFTY AUG FUT) 11012

    As per the output the Net Payoff is coming to -53.05 but this strategy is supposed to yield a positive profit
    irrespective of the market movement direction.

    1. Why is the Net Returns negative? Am I missing something here?
    2. How to execute this strategy to get profitable returns?

    • Karthik Rangappa says:

      1) The net +ve returns are based on the premiums available at the given moment. So +ve returns are not always a guarantee.
      2) You have to time the premium for this.

  65. Anugnani says:

    I have downloaded the calculator and found that the same fixed arbitrage opportunity exists for any strike price (Not just ATM). The only condition is that the difference between the futures and spot should be greater than the debit required to take positions in options. I changed the strike prices however I like below the spot price (ATM Strike Price). Though the premium will not be same for the different strike prices, the point is that the pay off is fixed for whatever strike price we choose. If we change the strike prices to a value greater than the spot price (again assuming premiums are same which is not true in reality), then the pay off will be loss but fixed. I also did not understand if the short put is debit as mentioned by you. Is it not credit? I hope you will see this post and clarify though I am doubtful if you will read comments on something this old.

    • Karthik Rangappa says:

      I need to evaluate this myself, Anuganani. From what I can gather, it does seem ok to me. By the way, you are right, all short positions is a credit, not a debit.

  66. anugnani says:

    Very quick response indeed. I never expected that you will up so passionately that too during market hours. I executed one such bnf opportunity today and want to see it happen really. I think if I can get someone help me in writing a code for this and automating it, there will be no tension even if the monthly return is very low. Actually I was interested in this and had been searching on moneycontrol for quite sometime (cash-futures combo). But the problem was that the asset was never available at the prices it showed. Wish you write a story on automating and the costs involved in this. 1.5% per month without risk is also an excellent option in my perspective though many people aim to make more than 5% per day!

  67. Anugnani says:

    I hope you were not sarcastic with my wish of making 1.5% per month. Not all of us are gifted or competent to make 4-5% every day. That apart, you can paste any resource in your knowledge who can help in automating the trade because the premiums jump so quickly that the expected assured profit may be surpassed or may fall far below and even end in a loss. ATM BNF option can easily move 10 points in less than a minute. Wish at least basket order feature was available on kite. By the way the margin blocked is also much higher than the margin requirement shown on the margin calculator.

    • Karthik Rangappa says:

      1.5% per month is an amazing return, which translates to 18% per year. If you can sustain this return for a few years, you are talking about serious money 🙂
      Unfortunately, I do not know anyone who can help you with coding.

  68. Arjun D says:

    Can you elaborate about bull box spread and bear box spread and create a excel worksheet for these strategies

  69. Arjun D says:

    Thank you for the prompt response,Sir.
    I have one more question. I have used the excel sheet for synthetic long arbitrage trade and I have used closing prices of previous day. I have done my home work with Nifty and few stocks too. Now I want to enter into this strategy with those prices, but practically it is not possible because the prices change every millisecond and the net payoff too. It is practically not possible
    Sir, how to trade these strategies in live market. Is there any method such that my trade will be profitable?

    • Karthik Rangappa says:

      Hmm, Arjun there are two things that you can do –

      1) Make sure your excel ticks live. To do this you need to know a bit of excel macros or programming
      2) You can keep the excel ready and plug in the latest prices on the fly during the market hours.

  70. Sushant says:

    Please can you explain why one would go with this option strategy when a futures long would give the same end result… and that too without any premium ?

    • Karthik Rangappa says:

      In futures, your view is only in the direction of the market. However, with options your view can extend beyond the direction of the market, it can be on the speed at which the market is moving, time, and volatility.

  71. MANAS says:

    Hi Karthik sir ,

    My question related to synthetic long arbitrage .

    Point the above attached excel sheet does not calculate the IV and in order to the correct Payoff one should put the correct IV if i am not wrong .
    For an example
    I have long 1 slightly out of money call Option with a IV of 50 = with the price of 250
    and short a ATM money put option with a IV of 40 with the price of 270 . (Both for same expiry and same strike price )
    and short one future contract .

    Now as per the excel sheet
    it not consider the iV and says on the expiry date the profit will be calculated based on the intrinsic value .
    As per my finding ,i feel it will make loss if the IV will not remains same on the expiry date . Kindly clarify .

    Thank you .

    • Karthik Rangappa says:

      Manas, the synthetic arb is mainly to extract value from the mispricing. It is best you look at deltas and avoid IV here. Of course, you also need to ensure you are not buying a high IV premium and selling low IV. This is the only check you need to do with synthetic position.

  72. manas says:

    Hi Sir ,

    In the NSE cross currency EURUSD is allowed ? as it there in the site , However in Zerodha has not been added this script .

    Cross currency is allowed in India ? .


  73. Denis Patel says:




    • Karthik Rangappa says:

      Unfortunately no shortcuts here. But you will have to find a programmatic approach to this, Denis. Doing it manually is not really possible I guess.

  74. Ritesh Jha says:

    Hi Karthik,

    a basic question on options selling.. like margin requirement change in case of futures depending upon M2M, does the same happen with options (in case of shorting) ? If not then what is the rationale because for Option writers the risk/possibility of loosing huge sum of money is as good as a future short-seller

  75. Chandrasekhar says:

    Thank you sir for great lesson. Excellently explained with excel sheet. One questions, do we have Synthetic Short Arbitrage strategy?
    Taking same strike prices and example, can we have a opposite strategy?

    Short 7300 CE @ 79.5
    Long 7300 PE @ 73.85
    Long Nifty futures @ 7316

    Sir, may be I’m talking nonsense no expert like you. Please share your view.

  76. Abdul says:

    Hello Sir , Hope ua doing well.
    I want to know whats the current status of STT on exercising the rights.
    I went through the link u gave.
    Something has changed after September 19.
    So does that effects what we have studied in this chapter.
    Thank U Sir.

  77. Ajay Singh Bhati says:

    sir this option stategy works in weekly option also….

  78. R VINOD KUMAR says:

    Hi Karthik,
    Again correct me if I am wrong,
    1. I have gone through last few chapters and it took time to understand the logic of selling two OTM in Call Ratio Back spread, ultimately i read one of your comment, to adjust the delta the strategy is suggested to go long on two OTMs.
    2. In this above chapter the strategy becomes delta neutral once we Short Future (Delta for ATM CE 0.5+ and Delta for ATM PE 0.5+ since we have shorted, total becomes 1 and adding futures will have a delta of -1= Hence total position Delta- 0)

Post a comment