Long Put Synthetic Straddle
long synthetic straddle (put & call)
 Details
 Category: synthetic futures and option strategies
 Published on Thursday, 18 February 2010 19:30
long put synthetic straddle
the long put synthetic straddle recreates the long straddle strategy by buying the underlying stock and buying enough atthemoney 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 straddle construction

buy 2 at the money puts

long 100 shares

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.
unlimited profit potential
large gains are made with the long put syntethic straddle when the underlying asset price makes a sizable move either upwards or downwards at expiration.the formula for calculating profit is given below:
 maximum profit = unlimited
 profit achieved when price of underlying > purchase price of underlying + net premium paid or price of underlying + commissions & fees
 profit = price of underlying  purchase price of underlying  premium paid or strike price of long put  price of underlying  premium paid commissions & fees
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 equals to the net premium paid is incurred by the options trader.the formula for calculating maximum loss is given below:
 max loss = net premium paid+ commissions & fees
 max loss occurs when price of underlying = strike price of long put
breakeven point(s)
there are 2 breakeven points for the long put synthetic straddle position. the breakeven points can be calculated using the following formulae. upper breakeven point = purchase price of underlying + premium paid + commissions & fees
 lower breakeven point = strike price of long put  premium paid  commissions & fees
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 inthemoney and has 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.
commissions
for ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts and varies across option brokerages.
long call synthetic straddle
the long call synthetic straddle recreates the long straddle strategy by shorting the underlying stock and buying enough atthemoney calls to cover twice the number of shares shorted. that is, for every 100 shares shorted, 2 calls must be bought.
long call synthetic straddle construction

buy 2 at the money calls

short 100 shares

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.the formula for calculating profit is given below:
 maximum profit = unlimited
 profit achieved when price of underlying > strike price of long call + net premium paid or price of underlying
 profit = price of underlying  strike price of long call  net premium paid or sale price of underlying  price of underlying  net premium paid
limited risk
maximum loss for the long call syntethic 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 equals to the net premium paid is incurred by the options trader.the formula for calculating maximum loss is given below:
 max loss = net premium paid + commissions & fees
 max loss occurs when price of underlying = strike price of long call
breakeven point(s)
there are 2 breakeven points for the long call synthetic straddle position. the breakeven points can be calculated using the following formulae. upper breakeven point = strike price of long call + premium paid + commissions & fees
 lower breakeven point = sale price of underlying  premium paid  commissions & fees
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 inthemoney and has 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.
commissions
for ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts and varies across option brokerages.