Overview of Synthetic Strangle Investing
A synthetic strangle reproduces the payoff of a long strangle (long an out-of-the-money call plus long an out-of-the-money put) using stock and puts instead of a call. One construction is: own 100 shares, buy one put at the higher strike (this pair acts like a call at that strike through put-call parity), and buy one put at the lower strike. Like a regular long strangle, it profits if the stock moves far enough in either direction, its maximum loss is roughly the total premium paid (plus financing and dividend effects on the stock), and it gains when implied volatility rises. It is uncommon, and most traders simply buy the call and put. This article is educational, not investment advice.
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Profit and loss profile
At expiration, a long strangle loses the most (the total premium paid) when the stock ends between the two strikes. It profits above the upper strike plus the premium, or below the lower strike minus the premium. Upside profit is open-ended; downside profit is limited by the stock falling to zero. The synthetic version has approximately the same profile, but it ties up capital in the shares and is affected by dividends and borrowing costs.
Greeks
- Vega: positive. Rising implied volatility helps the position; falling volatility hurts it.
- Theta: negative. Time decay costs money every day the stock does not move.
- Gamma: positive. Delta grows in the direction of a large move.
- Delta: near zero when the stock sits between the strikes, so the position starts close to direction-neutral.
Risk management
- Size the position so the full premium is an acceptable loss.
- Set a time or loss exit, because theta accelerates close to expiration.
- Avoid paying up for options when implied volatility is already high, since a volatility drop can cause losses even after a move.
- For the synthetic version, account for the capital in the stock, dividends, and the risk of early assignment on any short legs if you adjust the trade.
Modeling it in Excel with MarketXLS
MarketXLS is an Excel add-in that returns stock and option quotes, so you can price each leg in a sheet: =Last("AAPL") for the stock, =OptionSymbol(...) to build each put, and =QM_Bid(...) or =QM_Ask(...) for option prices. Stock quotes are 15-minute delayed on the Standard plan, options data is end-of-day on Standard, and both are real-time on the Advanced and Business plans. The templates below model related synthetic straddles.
Related synthetic straddle workbooks for comparison—not models of the strangle described above:
Long Put Synthetic Straddle
Synthetic Short Straddle with Calls
Synthetic Short Straddle with Puts
Search for all templates here: MarketXLS templates
For a different setup, read the synthetic short straddle with puts guide: