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

 
  Short Call Synthetic Straddle Profile Chart  
 

 
Description:

 

Short Call Synthetic Straddle is Short Straddle with different composition. We buy stock and Sell Calls (near the money) on ratio 1:2. If we look carefully though, it’s a covered call but contracts on Sell Call part are doubled, therefore creating a risk profile like Short Straddle.

 

This strategy is not recommended for beginner traders as it’s very risky. This strategy is more expensive than Short Straddle even though its breakeven point and the maximum reward are almost identical.

 
  Example  
 

 

Entry:


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

 

Buy 100 MSFT Stock @ $34

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

 

Investment @ Entry = (Stock Price x 100 Shares) + (Premium of Call Leg x No of Contracts x 100 Shares) = $3,400 - $160 = $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 = $37.6

 

Exit:

 

Best Case Scenario:

Stock Price :

 $35.00 up $1.00
   
Buy/Sell :
Sell
    
Strike Price :
35 Call
} Premium: $0.00
Expiration Date :
December

 

Profit @ Exit = (Stock Price x 100 Shares) + (Premium of Call Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $3,500 - $3,240 = $260


Return of Investment = Profit @ Exit / Investment @ Entry = 8%

 

Worst Case Scenario : Unlimited Loss

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%