Long call synthetic straddle is a synthetic option strategy with two legs. It replicates long straddle with a combination of short underlying position and call options. Like long straddle, it is long volatility and has limited loss and unlimited potential profit.
In synthetic straddle, either the call or the put is replaced with its synthetic equivalent.
There are therefore two variants of the synthetic long straddle strategy (the other is long put synthetic straddle).
Long straddle = long call + long put
Synthetic put = short underlying + long call
Long call synthetic straddle = short underlying + 2x long call
The long call position size doubles (one part is the long call from classic long straddle, the other is from the synthetic put).
Long call synthetic straddle is created with the following transactions:
- Buy 2 call option contracts.
- Sell short 100 shares of the underlying stock.
This assumes one option contract represents 100 shares of the underlying stock, as for US traded stock options.
The short underlying position (number of shares sold short, in our example 100) must always correspond to half the shares represented by the long call options (in our example 200 shares, from two contracts).