Simultaneously buying a call option and a put option on the same underlying asset with the same expiration date and strike price.
Alias
This position is also known as a straddle.
Description
A synthetic long straddle with calls is a neutral strategy, as the investor profits if the underlying asset moves significantly in either direction, but incurs a loss if the underlying asset does not move significantly before the options expire. The potential profit for this position is unlimited, as the value of the position will increase with no upper bound as the underlying asset price increases or decreases beyond the strike price. However, the potential loss is limited to the premium paid for the options.
The call option gives the holder the right to buy the underlying asset at the strike price, while the put option gives the holder the right to sell the underlying asset at the strike price.
A synthetic long straddle with calls can be a useful tool for investors who expect the price of the underlying asset to make a significant move, but are uncertain about the direction of the move.
Breakeven
strike price of the options plus the premium paid for the synthetic position, which is the total cost of the call and put options
Sweetspot
Stock price either goes way up or way down
Max profit
unlimited, as the underlying asset’s price can continue to rise beyond the breakeven point.
Max loss
Limited. total premium paid for the position, which is the cost of the call and put options.
