Call 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 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.
may notice that the Long Call Synthetic Straddle is similar to the Synthetic
Call, except that here we buy twice the number of calls.
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.
is trading at $35.07 on June 2, 2011.
500 shares of stock at $35.07.
10 August 2011 35 strike calls at $3.00.
benefit is, with no capital outlay, you can make a profit from an increasingly
volatile stop with your risk capped.
risk is if the stock rises. The reward is uncapped.
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.
even up: (stock price plus (call premium times two)) minus (two times (stock
price minus strike price)).
even down: stock price minus (two times the premium bought).
volatility has a positive effect on this trade.
Of Time Decay
need time in this position for the stock to move, but your long calls are
subject to the negative effect of time decay.
the stock drops, buy back the stock to make a profit and wait for retracement
to profit from the calls.
the stock rises, sell the calls to make a profit and wait for retracement to
profit from the short stock.
a news event, exit the position if there is no movement, or if there has been a
avoid time decay, exit position before the last month.
the position by selling your call options and buying back the stock.