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.