Long Put Synthetic Straddle

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The Long Put Synthetic Straddle recreates the Long Straddle strategy by buying the underlying stock and buying enough at-the-money puts to cover twice the number of shares purchased. That is, for every 100 shares bought, 2 put contracts must be bought.

Long Put 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 future.

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Unlimited Profit Potential

Large gains are made with the Long Put Synthetic Straddle when the underlying asset price makes a sizable move either upwards or downwards at expiration.

Limited Risk

Maximum loss for the Long Put Synthetic Straddle occurs when the underlying asset price on expiration date is trading at the strike price of the put options purchased. At this price, both options expire worthless, while the long stock position achieved breakeven. Hence, a maximum loss equal to the net premium paid is incurred by the options trader.

Breakeven Point(s)

There are 2 break-even points for the Long Put Synthetic Straddle position. The breakeven points can be calculated using the following formulae.

Example

Suppose XYZ stock is trading at $40 in June. An options trader executes a Long Put Synthetic Straddle by buying two JUL 40 puts for $200 each and buying 100 shares of XYZ stock for $4000. The net premium paid for the puts is $400.

If XYZ stock plunges to $30 on expiration in July, the two JUL 40 puts expire in-the-money and have an intrinsic value of $1000 each. Selling the put options will net the trader $2000. However, the long stock position suffers a loss of $1000. Subtracting the initial premium paid of $400, the Long Put Synthetic Straddle's profit comes to $600.

On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 put options expire worthless while the long stock position broke even. Hence, the Long Put Synthetic Straddle suffers a maximum loss which is equal to the initial net premium paid of $400 taken to enter the trade.

Long Call Synthetic Straddle

The synthetic straddle can also be implemented using calls instead of puts and that strategy is known as the Long Call 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.

Strip

Strap

Short Put Ladder

Short Put Synthetic Straddle

Since the Long Straddle can be synthetically constructed, similarly, the Short Straddle can be reconstructed using the Short Put Synthetic Straddle strategy. Short Put Synthetic Straddles are utilized when the underlying asset 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.