Investment Type: Credit
Strike Prices: ATM/OTM for Call
Expiration Month: No Restriction
Composition: Sell Stock + Buy two Calls

 
  Long Call Synthetic Straddle Profile Chart  
 

 
Description:

 

Long Call Synthetic Straddle is Long Straddle with different composition. We short stock and Buy Call (near the money) on ratio 1:2. This creates the same risk profile as Long Straddle.

The main difference between the two strategies is that we don’t have time limit on the short side and the return also will be much smaller. but the breakeven point and the maximum risk and reward are almost the same.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

 

Sell 100 MSFT Stock @ $34

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
} Premium: $0.80
Expiration Date :
December
No of Contracts :
2
    

 

Investment @ Entry = (Stock Price x 100 Shares) + (Premium x No of Contracts x 100 Shares) = ($3,400) + $160 = Credit ($3,240)

 

Breakeven Point Down = Stock price – Premium = $34.00 – (2 x $0.80) = $34.00 - $1.60 = $32.40
Breakeven Point Up = (Stock price + 2 x Premium) – 2 x (Stock Price – Strike Price) = ($34.00 + $1.60) – 2 x ($34.00 - $35.00) = $35.60 + $2.00 = $37.60

 

Exit:

Best Case Scenario:

Stock Price :

 $40.00 up $6.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
} Premium: $5.00
Expiration Date :
December

 

OR

 

Stock Price :

 $ 30.00 down $4.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
} Premium: $0.00
Expiration Date :
December

 

 

Profit @ Exit = (Stock Price x 100 Shares) + (Premium x No of Contracts x 100 Shares) – Investment @ Entry = ($4,000) + $1,000 - $3,240 = $240


Return of Investment = Profit @ Exit / Investment @ Entry = 7%

 

OR

 

Profit @ Exit = (Stock Price x 100 Shares) + (Premium x No of Contracts x 100 Shares) – Investment @ Entry = ($3,000) + $0 - $3,240 = $240


Return of Investment = Profit @ Exit / Investment @ Entry = 7%

 

Worst Case Scenario : ((Contracts x value per point) / number of sold Shares) x call premium + call strike price – stock price sold

Stock Price
Profit/Loss
ROI

30.00

240

7%

32.50

-10

0%

35.00

-260

-8%

37.50

-10

0%

40.00

240

7%