The best way to think of the long call synthetic straddle is as a means of doubling your potential profits. This is achieved by the simple expedient of purchasing enough at the money calls to cover twice the number of shares shorted. That means a trader would have to purchase two calls for 100 shares.
The long call synthetic strategy is a very risky play, but it is potentially a very profitable one. As with long call strategies, the maximum profit is theoretically unlimited. The profit is achieved when the price of the underlying stock exceeds the strike price of the long call minus the net premium or the sale price.
Obviously, the long call synthetic straddle is a very complex strategy, which means that there’s a lot that can go wrong with it. The maximum loss occurs when the underlying asset trades below the strike price of the call options. Unfortunately, there are several other points at which losses can occur.
Double the Risk Double the Profit Potential
The appeal of the long synthetic call is an obvious one; a trader can theoretically double his or her profit by employing it. Unfortunately, the risks are also doubled.
A person should only employ this strategy when he or she has quite a lot of extra money to risk in the market. If you cannot afford to lose money, you should stay away from this call strategy.
Yet if you have some extra cash, you can profit handsomely. It is theoretically possible to make four times your investment by employing this variation on the straddle.
When to Use the Long Synthetic Straddle
The long synthetic straddle works best with undervalued stocks in a bull market. It is usually employed when a trader believes that a particular asset is underpriced but about to go up in price in coming months.
The strategy works best with a steady rise in price, but a trader that can move fast can profit from sudden movements. The volatility of today’s market makes this strategy ideal, particularly with the large number of undervalued stocks.
The danger, of course, is from a bear market or a failure to rise in price. If a stock sits at the price, the straddle will not work.
For the long synthetic straddle to work, the trader may need to schedule movements several months in advance. A person might employ the straddle to coincide with the release of news that can boost a stock’s value such, as an earnings report or news about a dividend.
A Stock Picker’s Strategy
The long synthetic straddle is definitely a stock picker’s strategy. It is often used to finance purchases of shares that a trader believes will have long-term value. It may also be used to take advantage of an undervalued stock.
As with most long strategies, this kind of straddle will not work in a bear market. It won’t work in the bear market because the stock movements will not generate the kind of profit needed to purchase more shares.
The long synthetic straddle is an excellent play to use with trading robots. The robots are in a better position to take advantage of the movement than a human trader.
A great advantage to trading robots is that the long straddle player can schedule strikes months in advance. That obviously increases the risk, but it can increase the potential profit. A long synthetic straddle executed through a trading robot would be an ideal means of taking advantage of today’s bull market.