I was wondering if a straddle or strangle can become profitable before it hits the upper or lower BE points if the move happens quick enough after opening the position? Since the delta of the winning side moves in your favor and the losing side loses momentum, can this work? Or do they cancel each other out (if both start at .5 delta) until the BE point? I paper traded a synthetic (short stock to 2 long calls) ATM straddle on DBRN and had an $80 profit the next day and I believe it was still in the loss range. Perhaps I opened it wrong or the calls were not at .5 delta. Also, does a synthetic straddle give favor to the stock side since there is no time decay? IE: if short the stock more favor to the downside and long stock to the upside? Any help in figuring this out would be much appreciated
Think about it, in your synthetic you have 2 CALLs therefore you have the same amount of decay as a natural straddle with 1 PUT and 1 CALL i.e the same number of options. The synthetic for most intents and purposes is arbitrage equivalent to the natural at all points in time and all points on the risk map. Given that you are aware of the decay factor, it should not come as a surprise that you can make money on a straddle prior to expiration if there is a favorable move. As the options decay, the risk profile morphs towards the expiration risk profile and B/E points that you probably have in mind. The B/E points prior to expiration are not the same. Use some decent position analysis/calculator and it should all become clear. Good luck. MoMoney.