The long call synthetic straddle recreates the long straddle strategy by shorting the underlying stock and buying enough at-the-money calls to cover twice the number of shares shorted. That is, for every 100 shares shorted, 2 calls must be bought.
Sell short 100 shares; Buy 2 calls. Use the same strike price and expiration date.
Long call synthetic straddles are unlimited profit, limited risk options trading strategies that are used when the options trader feels that the underlying asset price will experience significant volatility in the near term.
Profit potential
Profit can increase without a finite upper bound as the underlying rises.
Unlimited as the stock price rises.
Loss potential
Loss is finite under the stated assumptions, but can be substantial. A stock or nonnegative index cannot fall below zero.
Strike price plus net opening cost.
Breakeven points
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Zero minus net opening cost. Use this result only if it is at or below the strike price.
- Net opening cost plus twice the strike price. Use this result only if it is at or above the strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader enters a long call synthetic straddle by buying two JUL 40 calls for $200 each and shorting 100 shares for $4000. The net premium paid for the calls is $400.
If XYZ stock is trading at $50 on expiration in July, the two JUL 40 calls expire in-the-money and has an intrinsic value of $1000 each. Selling the call options will net the trader $2000. However, the short stock position suffers a loss of $1000. Subtracting the initial debit of $400, the long call synthetic straddle trader's profit comes to $600.
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 calls expire worthless while the short stock position broke even. Hence, the long call synthetic straddle trader suffers a maximum loss which is equal to the initial net premium paid of $400 taken to enter the trade.
Long Put Synthetic Straddle
The synthetic straddle can also be implemented using long puts instead of long calls and that strategy is known as the long put synthetic straddle.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Short Call Synthetic Straddle
Since the long straddle can be synthetically constructed, likewise, the short straddle can be recreated using the short call synthetic straddle strategy. Short call synthetic straddles are used when the underlying stock price is perceived to be non-volatile.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.