construct a straddle at the strike price not available?

Discussion in 'Options' started by emk662, Aug 25, 2006.

  1. emk662


    To all options gurus,
    Is it possible to construct a straddle at a strike price not available? For example, stock XYZ has options at strike prices of 37.5, 40, 42.5, 45, etc. Currently XYZ stock price is 41. Is it possible to make a straddle at 41?
  2. MTE


  3. Why not?
  4. MTE


    How would you do it? Any synthetic combination will yield the available strike prices.

    I'd like to see how it's done though, if it is possible.
  5. emk662


    What is synthetic combination?
  6. Synthetic: long[short] 100 shares // short[long] 2 40 calls

    You cannot synthesize a symmetrical straddle mid strike, unless you're trading otc.
  7. MTE


    I'm referring to synthetics that are derived from the put-call parity relationship - that is, any of the 3 elements (call, put, stock) can be constructed using the other two (i.e. a synthetic equivalent).

    For example, long put plus long stock is the synthetic equivalent of a long call. Long straddle (call plus put) can be constructed as short stock plus two long calls or long stock plus two long puts.

    Synthetics have exactly the same risk:reward ratio and greeks.
  8. tower


    I don't know if this is true for stock options but I do know you can do this in futures markets (at least at the CME) using flex options.

    With flex options you can set the exercise prices, style (European/American) and expiration dates. You don't need to synthesize anything.
  9. It's a quasi-otc market. yawn.
  10. tower



    He asked a question that, at least at the CME, has a very simple answer. Flexes are written all the time down here. While it may not be as cool as some of your arcane strategies, it does provide him with the ability to buy or sell a straddle without a pre-existing strike.

    This, I believe, was his question.
    #10     Oct 14, 2006