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Long Put 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 Put Synthetic Straddle involves buying puts and counteracting them with a Long Stock position. To create the Straddle shape, we have to buy twice the number of puts. So for every 100 shares we buy, we have to buy two put contracts, which represent 200 shares of the stock. The Long Stock position replicates the action of buying the same number of calls as puts. Because we’re buying stock to counteract the long puts in this case, the Long Put Synthetic Straddle is an expensive strategy, requiring a large net debit.    

 

Market Opinion

 

Neutral. However, at the same time, looking for increased volatility in the stock movement.

 

P/L

 

 

 

 

 

 

 

 

When To Use

 

Use this strategy when you expect a stock to have increased volatility, in either direction.

 

Example

 

XXXX is trading t $35.07 on June 4, 2011.

Buy 500 shares of stock at $35.07.

Buy 10 August 2011 35 strike puts at $2.85.

 

Net debit: stock price plus (2 times put premium) = $40.77

 

Benefit

 

The benefit is that you can profit from an increasingly volatile stock, moving in either direction, with capped risk and unlimited upside profit.

 

Risk vs. Reward

 

The risk is loss when the stock trades at expiration at the strike price of the put purchased. The reward can be unlimited.

 

Net Upside

 

Uncapped.

 

Net Downside

 

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

 

Break Even Point

 

Break even up:  stock price plus (2 times the put premium)

 

Break even down: (put strike plus (premium times 2) plus (put strike minus stock price)

 

Effect Of Volatility

 

Volatility has a positive effect because we are long in options.

 

Effect Of Time Decay

 

Negative for your long puts.

 

Alternatives Before Expiration

 

If the stock has not moved decidedly up or down, sell the entire position at least one month before expiration. Do not hold a straddle the last month.

 

Alternatives After Expiration

 

Close out the position.

 

 

 

 
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