Synthetic Call Vs Covered Strangle Options Trading Strategy Comparison

A Synthetic Call option strategy is when a trader is Bullish on long term holdings but is also concerned with the associated downside risk.

A covered strangle strategy can be used when you are bullish on the market but also want to cover any downside risk. You are prepared to sell the shares on profit but are also willing to buy more shares in case the prices fall.

The Strategy is perfect to apply when you're bullish on the market and expecting less volatility in the market.

• Buy Underlying
• Buy Put Option

The strategy is used by buying PUT OPTION of the underlying you're holding for long. If the price of the underlying rises then you make profits on holdings. If it falls then your loss will be limited to the premium paid for PUT OPTION.

The covered strangle options strategy can be executed by buying 100 shares of a stock while simultaneously selling an OTM Put and Call of the same the stock and similar expiration date.

There are 2 break-even points in the covered strangle strategy. One is the Upper break even point which is the sum of strike price of the Call option and premium received while the other is the lower break-even point which is the difference strike price of short Put and premium received.

Maximum loss happens when price of the underlying moves above strike price of Put.

Max Loss = Premium Paid

The risk on this strategy is only on the downside when the price moves below the strike price of the Put option.

Maximum profit is realized when price of underlying moves above purchase price of underlying plus premium paid for Put Option.

Profit = (Current Price of Underlying - Purchase Price of Underlying) - Premium Paid

The maximum profit on this strategy happens when the stock price is above the call price on expiry. The profit is the total of the gain from buying/selling stocks and net premium received on selling options.

Underlying goes up

You will earn the maximum profit when the price of the stock is above the Call option strike price on expiry. You will be assigned on the Call option, would be able to sell holding shares on profit while retaining the premiums received while selling the options.

Underlying goes down and option exercised

The maximum loss would be when the stock price falls drastically and turns worthless. The premiums received while selling the options will compensate for some of the loss.

Provides protection to your long term holdings.

• As the strategy involves buying shares when prices fall, there is long-term gain even if their short-term loss.
• There is no upside risk due to the long position in stocks.
• Allows you to earn income in a moderately bullish market.

You can incur losses if underlying goes down and the option is exercised.

• The substantial risk when the price moves downwards.
• Risk of assignments.