The Long Call Synthetic Straddle recreates the Long Straddle strategy by shorting the underlying stock and buying enough at-the-money calls to cover twice the number of shares shorted. That is, for every 100 shares shorted, 2 calls must be bought.
Sell short 100 shares; Buy 2 calls. Use the same strike price and expiration date.
Long Call Synthetic Straddles are unlimited profit, limited risk options trading strategies that are used when the options trader feels that the underlying asset price will experience significant volatility in the near term.
Unlimited Profit Potential
Large gains are made with the Long Call Synthetic Straddle when the underlying asset price makes a sizable move either upwards or downwards at expiration.
Unlimited as the stock price rises.
Limited Risk
Maximum loss for the Long Call Synthetic Straddle occurs when the underlying asset price on expiration date is trading at the strike price of the call options purchased. At this price, both options expire worthless, while the short stock position achieved breakeven. Hence, a maximum loss equal to the net premium paid is incurred by the options trader.
Strike price plus net opening cost.
Breakeven Point(s)
There are 2 break-even points for the Long Call Synthetic Straddle position. The breakeven points can be calculated using the following formulae.
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Zero minus net opening cost. Use this result only if it is at or below the strike price.
- Net opening cost plus twice the strike price. Use this result only if it is at or above the strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader enters a Long Call Synthetic Straddle by buying two JUL 40 calls for $200 each and shorting 100 shares for $4000. The net premium paid for the calls is $400.
If XYZ stock is trading at $50 on expiration in July, the two JUL 40 calls expire in-the-money and have an intrinsic value of $1000 each. Selling the call options will net the trader $2000. However, the short stock position suffers a loss of $1000. Subtracting the initial debit of $400, the Long Call Synthetic Straddle trader's profit comes to $600.
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 calls expire worthless while the short stock position broke even. Hence, the Long Call Synthetic Straddle trader suffers a maximum loss which is equal to the initial net premium paid of $400 taken to enter the trade.
Long Put Synthetic Straddle
The synthetic straddle can also be implemented using long puts instead of long calls and that strategy is known as the Long Put Synthetic Straddle.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Short Call Synthetic Straddle
Since the Long Straddle can be synthetically constructed, likewise, the Short Straddle can be recreated using the Short Call Synthetic Straddle strategy. Short Call Synthetic Straddles are used when the underlying stock price is perceived to be non-volatile.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
