Tim Olson
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35 lines
1.5 KiB
Markdown
35 lines
1.5 KiB
Markdown
---
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description: "A volatility strategy shorting stock and buying two ATM calls at strike K, replicating a long straddle by replacing the long put with a synthetic put."
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tags: [options, volatility, neutral, synthetic, straddle]
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---
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# Long Call Synthetic Straddle
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**Section**: 2.28 | **Asset Class**: Options | **Type**: Volatility
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## Overview
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The long call synthetic straddle (the same as a long straddle with the put replaced by a synthetic put) amounts to shorting stock and buying two ATM (or nearest ITM) call options with strike K. The trader's outlook is neutral. This is a capital gain strategy. We assume S0 >= K and D > S0 - K.
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## Construction
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- Short 1 share of stock at S0
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- Buy 2 ATM call options at strike K, same expiry
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Net debit: D (assumed D > S0 - K)
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## Payoff Profile
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f_T = S0 - S_T + 2 × (S_T - K)+ - D
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- Upper breakeven: S*_up = 2K - S0 + D
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- Lower breakeven: S*_down = S0 - D
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- Max profit: P_max = unlimited (large move in either direction)
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- Max loss: L_max = D - (S0 - K) (at S_T = K; intrinsic offset reduces loss)
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## Key Conditions / Signals
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- Neutral view; expects a large move in either direction
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- S0 >= K (stock at or above the call strike)
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- D > S0 - K prevents arbitrage
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- Useful when puts are expensive relative to calls (use calls to synthesize the straddle)
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## Notes
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The short stock position combined with two long calls replicates a straddle by put-call parity. The maximum loss is reduced by the amount S0 - K (intrinsic value of the synthetic put component).
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