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)]
