Short Call Synthetic Straddle – The Option Strategy Desk Reference

Short Call Synthetic Straddle

Strategy: Sell 2n ATM Calls, 56 DTE

Buy or Own n × 100 Shares

Example:

Price Chart: Downtrending

Current IV%: 40%

IV Rank: 50

Trade: Sell 2n ATM call options; buy/own n × 100 shares.

Typical Strike Delta:

ATM Short Calls 0.50 (2n short call Delta = 1.0)

Goals: This strategy emulates the short straddle option strategy. Like the less aggressive version of the synthetic short stock strategy, traders expect the price of the underlying security to experience a price drop, as shown in this trade’s risk profile. As the stock price drops, the short calls move farther OTM. This hedges the long stock’s price drop.

Manage: When the stock drops in value by several dollars per share, monitor the trade’s P/L value. Because this is essentially a hedging strategy, the short calls can be closed for less premium than originally paid. As with most hedging strategies, they minimize losses rather than being a for-profit strategy. The stock ownership provides additional opportunities. Once the short calls are closed for profit, the stock can be used in a series of covered calls or simply held until the price approaches a support level and reverses direction.

Profit: If the trader’s bearish bias is confirmed by a price drop, the trade should be closed when the short call options achieve a profit of 30 ­percent or more. As mentioned in the previous paragraph, this is a hedging strategy. If the stock price begins to rally, buy to close the short call options and sell the stock when it rallies above the original $24.16 purchase price.

Loss: If the trader’s bearish bias is wrong and the price begins to rally, both the short calls and the long puts will begin to lose value. This is especially punishing if a strong upward breakout occurs. So, this trade can potentially suffer a 50 percent or greater loss. Like the synthetic long and short stock strategies, the trader should be confident that a strong price drop will occur before using this synthetic short stock split strikes strategy.