Put Synthetic Straddle
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.
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
However, at the same time, looking for increased volatility in the stock
this strategy when you expect a stock to have increased volatility, in either
is trading t $35.07 on June 4, 2011.
500 shares of stock at $35.07.
10 August 2011 35 strike puts at $2.85.
debit: stock price plus (2 times put premium) = $40.77
benefit is that you can profit from an increasingly volatile stock, moving in
either direction, with capped risk and unlimited upside profit.
risk is loss when the stock trades at expiration at the strike price of the put
purchased. The reward can be unlimited.
times value per point) divided by number of bought shares times put premium
paid plus stock price minus put strike price.
even up: stock price plus (2 times the put premium)
even down: (put strike plus (premium times 2) plus (put strike minus stock
has a positive effect because we are long in options.
Of Time Decay
for your long puts.
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.
out the position.