Long put synthetic strangle is a synthetic option strategy with three legs. It replicates long strangle using a long underlying position and two put options with different strikes. Like long strangle, it is long volatility and has limited loss and unlimited potential profit.
Let's say a stock is currently trading at $81.25. We can set up a long put synthetic strangle with the following transactions:
- Buy 100 shares of the stock for $81.25 per share.
- Buy the 80-strike put option for $3.72.
- Buy the 85-strike put with same expiration for $6.57.
The resulting position has exposures similar to a 80-85 classic long strangle: long 80-strike put and 85-strike call. The 80-strike put is the same, while the 85-strike call has been replaced with synthetic long call (long underlying and long 85-strike put).
- Long call synthetic strangle – the other variant with call options
- Long strangle – the classic position which this synthetic strategy replicates
- Short put synthetic strangle – the inverse position (replicating short strangle)
- Long put synthetic straddle – the two puts have same strike (replicating long straddle)