Using Long Synthetic Straddles with Stocks
Jim Graham

To be consistently successful trading in the stock market, it is just as important to limit losses as it is to achieve gains, and a hedged position allows you to manage your risk and losses. The normal way to protect against a decline in the stock price is to buy one put option for every 100 shares of stock you own. With this strategy, often called a protective or married put, you still lose money if the stock price drops but your losses are limited.

By buying more than one put against that same 100 share of stock, you can create a long synthetic straddle. This position gives you the possibility of making a profit even if the stock price declines. Combining multiple put options with a long position in the stock also makes this an easy position to adjust on an ongoing basis as the market changes.

Synthetic straddles have long been popular with futures traders, but this strategy can be used just as well with stocks.  You can also create short synthetic straddles by selling the stock short and buying call options. But many traders prefer not to go short stock, and I will focus only on long synthetic straddles in this article.

Synthetic straddles have many advantages over standard option straddles. The most important is that you can enter the synthetic with more confidence in situations where the volatility would be unsuitably high for the standard straddle. You would want to use synthetic straddles when some future event may occur that could cause the stock price to become more volatile or make a sudden move in a relatively short time.

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