The Short Call Synthetic Straddle recreates the Short Straddle strategy by buying the underlying stock and selling enough at-the-money calls to cover twice the number of shares purchased. That is, for every 100 shares bought, 2 call contracts must be sold.
Hold 100 shares; Sell 2 calls. Use the same strike price and expiration date.
Short Call Synthetic Straddles are limited profit, unlimited risk options trading strategies that are used when the options trader feels that the underlying asset price will experience very little volatility in the near future.
Limited Profit Potential
Maximum profit for the Short Call Synthetic Straddle is achieved when the underlying stock price on expiration date is trading at the strike price of the options sold. At this price, both written options expire worthless and the options trader gets to keep the entire net premium received taken as profit.
Strike price minus net opening cost.
Unlimited Risk
Large losses for the Short Call Synthetic Straddle can be sustained when the underlying stock price makes a strong move either upwards or downwards at expiration. A strong upward move will cause the uncovered short call to expire deep in the money while a strong downward move will cause the long stock position to suffer a serious loss.
Unlimited as the stock price rises.
Breakeven Point(s)
There are 2 break-even points for the Short 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
- Net opening cost. Use this result only if it is at or below the strike price.
- Twice the strike price minus net opening cost. 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 implements a Short Call Synthetic Straddle by selling two JUL 40 calls for $200 each and buying 100 shares of XYZ stock for $4000. The net premium received 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. Buying back the call options to close out the position will cost the trader $2000. However, the long stock position posted a gain of $1000. Taking into account the net premium of $400 received, the Short Call Synthetic Straddle's loss comes to: $2000 - $1000 - $400 = $600.
On expiration in July, if XYZ stock is still trading at $40, both the JUL 40 calls expire worthless while the long stock position broke even. Hence, the Short Call Synthetic Straddle trader made his maximum profit which is equal to the initial $400 net premium received upon entering the trade.
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 Put Synthetic Straddle
The synthetic Short Straddle can also be implemented using puts instead of calls and that strategy is known as the Short Put Synthetic Straddle.
Long Call Synthetic Straddle
Since the Short Straddle can be synthetically constructed, similarly, the Long Straddle can be recreated using the Long Call Synthetic Straddle strategy. Long Call Synthetic Straddles are used when the underlying stock price is perceived to be highly 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.
