Synthetic Flies

The Rationale (The "Why")

This is a capital protection and preservation strategy that uses stock plus an option structure to create a long stock position with full downside protection and a guaranteed minimum profit. It is a variation on the Synthetic Bull Call Spread, using the same core engine and principles.

This version uses the position's carry + dividends to finance a long call butterfly. This creates a trade with an even higher guaranteed profit floor and a highly targeted, high-payoff "profit tent" if the stock price lands within a specific range at expiration.

How to Trade It (The "What")

1. The ticket shows a Floor P (Floor Profit). This is the guaranteed minimum profit if held to expiration. Note that this cost is quite high by comparison to the average options trade, since this structure requires buying the stock itself (100 shares per lot.)
2. The ticket also shows a Peak P (Peak Profit). This is the maximum potential profit. Unlike a spread, this peak profit occurs only if the stock price rallies and finishes exactly at the middle strike of the call butterfly by expiration. It represents a much higher potential payoff, but for a much narrower price target.
3. The Maximum Loss is negative - i.e., the Floor P is the minimum return. The trade is structured so that it cannot lose money if held to expiration.
4. These positions are best entered on down days, since the increased volatility provides larger swings in the rather inelastic price of stock plus a long put. This requires working the limit fairly hard - getting in at the mid price would be ideal, but happens very rarely in my experience. Typically, I'll wait for a red day, assemble the trade, and put it out at mid. If no one bites for an hour, I rebuild using the new prices and offer at a penny or two over mid. Of course, raising the offer directly decreases Floor P by $1 for every penny. If I can't enter for 5-10% of the Floor P over mid - i.e., if the ticket says that the minimum return is $150, the max I'll offer is $0.15 over mid - then I'll try another day, or perhaps on a somewhat more volatile stock.