Synthetic Call Vs Long Straddle (Buy Straddle) Options Trading Strategy Comparison

A Synthetic Call option strategy is when a trader is Bullish on long term holdings but is also concerned with the associated downside risk.

The strategy is perfect to use when there is market volatility expected due to results, elections, budget, policy change, war etc.

When you are not sure on the direction the underlying would move but are expecting the rise in its volatility.

• Buy Underlying
• Buy Put Option

The strategy is used by buying PUT OPTION of the underlying you're holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT OPTION.

• Buy Call Option
• Buy Put Option

A straddle has two break-even points.

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = Strike Price of Call + Net Premium

Maximum loss happens when price of the underlying moves above strike price of Put.

Max Loss = Premium Paid

The maximum loss for long straddle strategy is limited to the net premium paid. It happens the price of underlying is equal to strike price of options.

Maximum Loss = Net Premium Paid

Maximum profit is realized when price of underlying moves above purchase price of underlying plus premium paid for Put Option.

Profit = (Current Price of Underlying - Purchase Price of Underlying) - Premium Paid

There is unlimited profit opportunity in this strategy irrespective of the direction of the underlying. Profit occurs when the price of the underlying is greater than strike price of long Put or lesser than strike price of long Call.

Underlying goes up

Max profit is achieved when at one option is exercised.

Underlying goes down and option exercised

When both options are not exercised. This happens when underlying asset price on expire remains at the strike price.

Provides protection to your long term holdings.

Earns you unlimited profit in a volatile market while minimizing the loss.

You can incur losses if underlying goes down and the option is exercised.

The price change has to be bigger to make good profits.