Papale on Synthetic Straddles

Shimmer Floor Wax — also a dessert topping!

I am told the new super food is something called Moringa.  It has 4 times the vitamin C of orange juice and 3.5 times the calcium of milk, more vitamin A than carrots, more iron than spinach and more potassium than bananas.  Has even been made into a soap and moisturizer.  Reminds me of an old Saturday Night Live skit…a product that was a desert topping and a floor wax.

Over the last couple of weeks we discussed two long vega volatility plays – the straddle and the strangle.  Both can benefit from increasing nervousness and volatility in the market and can profit no matter which way the market moves.  The straddle, if you remember is buying both a call and put at the same strike, usually around the at the money strike.  However you can have the same performance profile as the straddle by being long the stock and long some puts.  This is known as a synthetic straddle.

For example, say an investor owns 100 shares of MSFT.  He then would buy 2 puts.  One of the puts would create a married put position which is essentially a synthetic call:  + Stock + Put = +Call.  So we have a synthetically created long call.  The second put we buy simply completes the straddle.  For the short seller we can also create a synthetic straddle.  Assume we are short 100 shares of MSFT.  Now we buy two calls.  One of the calls creates a synthetic long put:  -Stock +C = +P.  The second call we buy is the call needed to complete the straddle.  So whether you are long or short shares, if you desire to have a straddle you can simply purchase the appropriate number of calls or put to construct the synthetic straddle.  Keep in mind that the greek characteristics of normal straddles also applies to synthetic straddle as well.  Good trading.

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