The short put synthetic straddle recreates the short straddle strategy by shorting the underlying stock and selling enough at-the-money puts to cover twice the number of shares sold. That is, for every 100 shares shorted, 2 put contracts must be written.
Sell short 100 shares; Sell 2 puts. Use the same strike price and expiration date.
Short put synthetic straddles are limited profit, unlimited risk options trading strategies that are used when the options trader feels that the underlying asset price will experience very little volatility in the near future.
Profit potential
Profit is bounded for the stated stock/index position.
Zero minus strike price minus net opening cost.
Loss potential
Loss can increase without a finite upper bound as the underlying rises.
Unlimited as the stock price rises.
Breakeven points
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Net opening cost plus twice the strike price. Use this result only if it is at or below the strike price.
- Zero minus net opening cost. 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 implements a short put synthetic straddle by selling two JUL 40 puts for $200 each and shorting 100 shares of XYZ stock for $4000. The net premium received for writing the put contracts is $400.
If XYZ stock is trading at $30 on expiration in July, the two JUL 40 puts expire in-the-money and has an intrinsic value of $1000 each. Buying back the the put options to close out the position will cost the trader $2000. However, the short stock position posted a gain of $1000. Taking into account the net premium of $400 received, the short put synthetic straddle's loss comes to: $2000 - $1000 - $400 = $600.
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 put contracts expire worthless while the short stock position broke even. Hence, the short put synthetic straddle trader made their maximum profit which is equal to the initial $400 net premium received upon entering the trade.
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
The synthetic short straddle can also be implemented using calls instead of puts and that strategy is known as the short call synthetic straddle.
Long Put Synthetic Straddle
Since the short straddle can be synthetically constructed, similarly, the long straddle can be recreated using the long put synthetic straddle strategy. Long put synthetic straddles are used when the underlying stock price is perceived to be highly 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.