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Synthetic Call Vs Short Strangle (Sell Strangle) Options Trading Strategy Comparison

Compare Synthetic Call and Short Strangle (Sell Strangle) options trading strategies. Find similarities and differences between Synthetic Call and Short Strangle (Sell Strangle) strategies. Find the best options trading strategy for your trading needs.

Synthetic Call Vs Short Strangle (Sell Strangle)

  Synthetic Call Short Strangle (Sell Strangle)
Synthetic Call Logo Short Strangle (Sell Strangle) Logo
About Strategy A Synthetic Call strategy is used by traders who are currently holding the underlying asset and are Bullish on it for the long term. But he is also worried about the downside risks in near future. This strategy offers unlimited reward potential with limited risk. The strategy is used by buying PUT OPTION of the underlying you are 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. The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... Read More
Market View Bullish Neutral
Strategy Level Beginners Advance
Options Type Call + Underlying Call + Put
Number of Positions 2 2
Risk Profile Limited Unlimited
Reward Profile Unlimited Limited
Breakeven Point Underlying Price + Put Premium two break-even points

When and how to use Synthetic Call and Short Strangle (Sell Strangle)?

  Synthetic Call Short Strangle (Sell Strangle)
When to use?

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 Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

Market View Bullish
Neutral

When you are expecting little volatility and movement in the price of the underlying.

Action
  • 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.

  • Sell OTM Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

Breakeven Point Underlying Price + Put Premium
two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"

Compare Risks and Rewards (Synthetic Call Vs Short Strangle (Sell Strangle))

  Synthetic Call Short Strangle (Sell Strangle)
Risks Limited

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

Max Loss = Premium Paid

Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - Net Premium Received

Rewards Unlimited

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

Limited

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

Maximum Profit Scenario

Underlying goes up

Both Option not exercised

Maximum Loss Scenario

Underlying goes down and option exercised

One Option exercised

Pros & Cons or Synthetic Call and Short Strangle (Sell Strangle)

  Synthetic Call Short Strangle (Sell Strangle)
Advantages

Provides protection to your long term holdings.

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

Disadvantage

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

Limited reward with high risk exposure.

Simillar Strategies Married Put Short Straddle, Long Strangle







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