Strategy: Buy 2n ATM Puts, ≤ 56 DTE
Buy or Own n × 100 Shares
Price Chart: Downtrending
Current IV%: ≥ 40%
IV Rank: ≈ 50
Trade: Buy 2n ATM put options; buy/own n × 100 shares.
Typical Strike Delta:
ATM Long Puts ≈ −0.50 (2n long put Delta = −1.0)
Goals: As shown by the plotline in this strategy’s risk profile, the long put synthetic straddle option strategy resembles a long straddle (buy an ATM call, buy an ATM put). A directional move in the price of the underlying stock returns a profit from either the stock or the two long options, while the opposite side of the strategy is abandoned. Therefore, check the price charts for stocks that typically make strong, week-long directional breakouts.
Manage: Recall how the Delta value of each share of stock is 1.0. The Delta value of two long ATM puts is −1.0. This is another example of a Delta-neutral option strategy. If the stock price drops in value, the stock is sold and the long put options are retained as they move deeper ITM for profit. Theta will begin to erode the premium of the long puts, so be ready to sell them before Theta begins to offset the stock’s price rally. Conversely, if the stock price increases in value, the stock is retained and the long puts are sold. Once this adjustment is made, monitor the remaining position and be prepared to close it if a reversal in the stock price occurs. If the stock is kept because of a rally, consider selling OTM call options to create a covered call.
Profit: If a substantial directional price move occurs (either up or down) and the trade is carefully managed, this strategy can quickly return hundreds if not thousands of dollars in profit. This amount is based on the number of shares and option contracts involved in the trade.
Loss: If the price of the underlying stalls and both the stock and the long puts are kept, Theta will begin to reduce the premium value of the long put options. And, of course, if one side of this trade is closed on the basis of a directional move and the price reverses direction, close the remaining position to either retain the position’s current profit or prevent what could become a substantial loss.