Long Call Synthetic Straddle

 

Description         

 

Straddles can be created synthetically in other words, instead of buying calls and puts together, we create the same risk profile by combining calls or puts with a long or short position in the stock.

 

The Long Call Synthetic Straddle involves buying calls and counteracting them with a short stock position. To create the straddle shape, we must buy twice the number of calls. So for every 100 shares we short, we must buy two call contracts, which represent 200 shares of the stock.

 

You may notice that the Long Call Synthetic Straddle is similar to the Synthetic Call, except that here we buy twice the number of calls.

 

Market Opinion

 

Neutral.

 

P/L

 

 

 

 

 

 

When To Use

 

Use this strategy when you think the stock is going to have significantly increased volatility in either direction so that you can profit and make a capital gain. If it rises, you make money from your calls. If it drops, you make money from your short stock position.

 

Example

 

XXXX is trading at $35.07 on June 2, 2011.

Short 500 shares of stock at $35.07.

Buy 10 August 2011 35 strike calls at $3.00.

 

Benefit

 

The benefit is, with no capital outlay, you can make a profit from an increasingly volatile stop with your risk capped.

 

Risk vs. Reward

 

The risk is if the stock rises. The reward is uncapped.

 

Net Upside

 

Uncapped.

 

Net Downside

 

(contracts times value per point) divided by the number of sold shares times the call premium paid plus the call strike price minus the stock price sold.

 

Break Even Point

 

Break even up: (stock price plus (call premium times two)) minus (two times (stock price minus strike price)).

 

Break even down: stock price minus (two times the premium bought).

 

Effect Of Volatility

 

High volatility has a positive effect on this trade.

 

Effect Of Time Decay

 

You need time in this position for the stock to move, but your long calls are subject to the negative effect of time decay.

 

Alternatives Before Expiration

 

If the stock drops, buy back the stock to make a profit and wait for retracement to profit from the calls.

 

If the stock rises, sell the calls to make a profit and wait for retracement to profit from the short stock.

 

After a news event, exit the position if there is no movement, or if there has been a profitable movement.

 

To avoid time decay, exit position before the last month.

 

Alternatives After Expiration

 

Close the position by selling your call options and buying back the stock.