Tim Olson
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1.4 KiB
1.4 KiB
description, tags
| description | tags | |||||
|---|---|---|---|---|---|---|
| A sideways strategy buying stock and selling two ATM calls at strike K, replicating a short straddle by replacing the short put with a synthetic short put. |
|
Short Call Synthetic Straddle
Section: 2.30 | Asset Class: Options | Type: Income
Overview
The short call synthetic straddle (the same as a short straddle with the put replaced by a synthetic put) amounts to buying stock and selling two ATM (or nearest OTM) call options with strike K. The trader's outlook is neutral. This is a capital gain strategy. We assume S0 <= K.
Construction
- Buy 1 share of stock at S0
- Sell 2 ATM call options at strike K, same expiry
Net credit: C
Payoff Profile
f_T = S_T - S0 - 2 × (S_T - K)+ + C
- Upper breakeven: S*_up = 2K - S0 + C
- Lower breakeven: S*_down = S0 - C
- Max profit: P_max = K - S0 + C (at S_T = K)
- Max loss: L_max = unlimited (stock can rise without bound; short 2 calls)
Key Conditions / Signals
- Neutral view; expects stock to stay near K through expiry
- S0 <= K (stock at or below the call strike)
- High implied volatility makes the collected credit from the two short calls larger
Notes
Unlimited loss on the upside due to the two short calls. The long stock provides partial offset against rising prices but is insufficient beyond the breakeven. Active management or stop-losses are essential.