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+Chapter 21: Synthetic Stock Positions Created by Puts and Calls 323 
+initial difference between the stock price and the striking price. Of course, this col­
+lateral requirement would increase if the stock fell in price, and would decrease if the 
+stock rose in price, since there is a naked put. Also notice that buying stock creates a 
+$5,000 debit in the account, whereas the option strategy's debit is $100; the rest is a 
+collateral requirement, not a cash requirement. 
+The effect of this reduction in margin required is that some leverage is obtained 
+in the position. If XYZ rose to 60, the stock position profit would be $1,000 for a 
+return of 40% on margin ($1,000/$2,500). With the option strategy, the percentage 
+return would be higher. The profit would be $900 and the return thus 60% 
+($900/$1,500). Of course, leverage works to the downside as well, so that the percent 
+risk is also greater in the option strategy. 
+The synthetic stock strategy is generally not applied merely as an alternative to 
+buying stock. Besides possibly having a smaller profit potential, the option strategist 
+does not collect dividends, whereas the stock owner does. However, the strategist is 
+able to earn interest on the funds that he did not spend for stock ownership. It is 
+important for the strategist to understand that a long call plus a short put is equiva­
+lent to long stock. It thus may be possible for the strategist to substitute the synthet­
+ic option position in certain option strategies that normally call for the purchase of 
+stock 
+SYNTHETIC SHORT SALE 
+A position that is equivalent to the short sale of the underlying stock can be estab­
+lished by selling a call and simultaneously buying a put. This alternative option strat­
+egy, in general, offers significant benefits when compared with selling the stock short. 
+Using the prices above - XYZ at 50, January 50 call at 5, and January 50 put at 4 -
+Table 21-2 depicts the potential profits and losses at January expiration. 
+Both the option position and the short stock position have similar results: large 
+potential profits if the stock declines and unlimited losses if the underlying stock rises 
+in price. However, the option strategy does better than the stock position, because 
+the option strategist is getting the benefit of the time value premium. Again, this is 
+because the call has more time value premium than the put, which works to the 
+option strategist's advantage in this case, when he is selling the call and buying the 
+put. 
+Two important factors make the option strategy preferable to the short sale of 
+stock: (1) There is no need to borrow stock, and (2) there is no need for an uptick. 
+When one sells stock short, he must first borrow the stock from someone who owns 
+it. This procedure is handled by one's brokerage firm's stock loan department. If, for