Overview of Synthetic Strangle Investing

Overview of Synthetic Strangle Investing

Synthetic Strangle is one of the most popular options trading strategies. It is mostly used in volatile markets when investors want to guard against both variance and vega exposure. The term ‘synthetic’ because it involves the use of two options contracts to achieve market neutrality. This strategy is popular with investors who want to make use of directional volatility while still hedging their portfolios with a market-neutral approach. This article will review the potential profit/loss potential, the underlying Greeks, and the risk management policies associated with Synthetic Strangle investing.

Profit/Loss Potential

Synthetic Strangle investors have the potential for unlimited profit and limited loss. The profit is achieved if the underlying asset moves outside the boundaries set by the lower options contract, which is known as the ‘floor’, or above the boundary set by the upper option contract, known as the ‘cap’. The loss side will be limited to the total cost of constructing the synthetic strangle.

Underlying Greeks

The most important underlying Greek is vega, which measures the sensitivity of an option contract to volatility. In a Synthetic Strangle strategy, the investor is exposed to both positive and negative vega exposure at the same time, which gives them a market-neutral advantage over directional investments. Other Greeks may also come into play, such as delta, gamma, theta, and rho, but these will generally be minimal.

Risk Management Policies

When investing in Synthetic Strangles, it is important to have a set of risk management policies in place. This may include setting a maximum loss to exit the position, setting daily loss limits, and diversifying across multiple strategies to reduce the overall portfolio risk. It is also important to keep an eye on the underlying Greeks and make sure that they do not put the investor into a situation where further losses could occur.

Options Strategies

Aside from Synthetic Strangle, there are many options strategies available to investors. These can range from long-term conservative approaches to more aggressive directional strategies. It is important for investors to familiarize themselves with all of the available strategies and pick the one that best aligns with their risk tolerance and financial objectives.

MarketXLS

MarketXLS is an excellent tool for options traders to use for portfolio hedging and risk management. With MarketXLS, traders can track their portfolio performance in real time and analyze various options strategies and their profitability over time. MarketXLS also provides data and analytics that can be used to determine the best time to enter and exit positions, thus maximizing returns for the investor.

Overall, Synthetic Strangle investing is an excellent way for investors to take advantage of volatility in the markets without having to take on too much directional risk. It provides market neutrality while still allowing investors to benefit from potential profits, and risk management policies should always be in place to help minimize any potential losses. With the right tools, such as MarketXLS, investors can maximize their returns while minimizing their risk.

Here are some templates that you can use to create your own models

Long Put Synthetic Straddle
Synthetic Short Straddle with Calls
Synthetic Short Straddle with Puts

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Long Put Synthetic Straddle (Using MarketXLS Template)
Short Call Synthetic Straddle Options Strategy (Using MarketXLS Template)
Synthetic Short Straddle With Puts Option Strategy