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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Long Call Synthetic Straddle

Risk: limited
Reward: unlimited

General Description
Entering a long call synthetic straddle entails buying (2) calls for every 100 shares of stock you are short. The risk profile is identical to a long straddle.

(draw a long call synthetic straddle risk diagram here)

The Thinking
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. But you're already short the stock. Instead of employing one of the various strategies that profits from a big move in either direction (such as a long straddle), you wish to use your short stock position to synthetically mimic such a strategy. This can be done by buying calls. If the underlying drops, your short stock will net you a profit (granted it has to drop enough to compensate you for the net debit incurred by buying the calls). If the stock rallies, the gains from one of the long calls will cancel out the loss from the short stock, and the remaining long call will net you a profit (again, once the stock has moved up enough to pay for the net debit).

Example

XYZ is at $55. You short 100 shares of the stock at $55.00 and then buy (2) 55 calls at $4.00 each. The net debit is $8.00 plus the short stock.

If the stock closes at $55 on expiration day, the calls expire worthless, and you’ll lose the net debit paid to initiate the trade.

If the stock drops, you’ll make money point-for-point with the stock, but the stock will have to drop 8 points to compensate you for the total loss of the calls which will expire worthless. For example, at $45, you’ll be up $10 on the short stock, and the calls will expire worthless ($8.00 loss). The net will be a $2.00 profit.

If the stock rallies, the loss from the short stock position will be countered by a gain from one of the long calls, and the other long call will increase in value point-for-point with the underlying. But like the needed downside move, the stock has to move 8 points in-the-money before this remaining call will start making you money. For example, at $65, you’ll be down $10 on the short stock, and the calls will be worth $10 each ($6.00 profit each). The net will be a $2.00 profit.

The PL chart below graphically shows where this trade will be profitable and at a loss.