Long Call Synthetic Straddle

Long Call Synthetic Straddle

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 23, 2021

Basics Concepts – Long Call Synthetic Straddle

Description – Long Call Synthetic Straddle

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.
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.
Short the stock (if We sell 50 shares for every call contract you buy).
Buy two ATM calls per 100 shares you sell.
If the current stock price isn’t near the nearest strike price, then it’s better to choose the nearest ITM strike (lower than the current stock price).

Steps to Trading a Long Call Synthetic Straddle

Steps In

Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern.
Try to concentrate on stocks with news events and earnings reports about to happen within two weeks.
Choose a stock price range you feel comfortable with.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Exit either a few days after the news event occurs if there is no movement or after the news event if there has been profitable movement.
If the stock thrusts up, sell the calls (making a profit for the entire position) and wait for a retracement to profit from the short stock.
If the stock thrusts down, buy back the stock (making a profit for the entire position) and wait for a retracement to profit from the calls.
Try to avoid holding the option into the last month; otherwise, you’ll be exposed to serious time decay.

Context - Long Call Synthetic Straddle

Outlook

long Synthetic Straddle, your outlook is neutral in terms of direction.

Rationale

To execute a net credit direction neutral trade, where you expect the stock to behave with increasing volatility in either direction.
If the stock rises explosively, you will make money from your calls, which rise faster than your short stock position falls.
If the stock falls, you will make profit from your short stock position, which increases in value faster than your calls lose value beyond the price you paid for the calls.

Net Position

If you’re trading stocks, this is a net credit trade because you are selling the stock and paying only a fraction of that credit for the Long Call options.
Your maximum risk is limited if the stock rises.

Effect of Time Decay

Time decay is harmful to the value of your Long Calls.
You need time for the stock to move explosively.

Appropriate Time Period to Trade

We want to combine safety with prudence on cost.
Breakeven Down = [Stock price – (call premium * 2)]
Breakeven Up = [Stock price + (call premium * 2)] – [(2 * (stock price -strike price))]

Exiting the Trade - Long Call Synthetic Straddle

Exiting the Position

If the share has moved decisively, then you simply unravel the trade by selling your call options and buying back the stock.

Mitigating a Loss

Unravel the position as described previously.

Advantages and Disadvantages

Advantages

Profit from a volatile stock moving in either direction.
Capped risk.
Uncapped profit potential if the stock moves.
No capital outlay.

Disadvantages

Significant movement of the stock and option prices is required to make a profit.
Bid/Ask Spread can adversely affect the quality of the trade.
Psychologically demanding strategy.

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