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.
