What Is ‘Synthetic Short Selling’ Using Futures and How Is It Used in Arbitrage?

Synthetic short selling is achieved by selling a futures contract without owning the underlying asset in the spot market. This creates a similar financial exposure to a traditional short sale.

In arbitrage, it is used in a 'reverse cash and carry' trade during backwardation. The trader sells the spot asset and simultaneously buys the futures contract, synthetically shorting the market while locking in the backwardation discount as profit.