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training_data/curated/text/456c014b78be15ebfc016d9d37e2343eceb18b94cec70f86bceb5a3b23152b07.txt

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+322 Part Ill: Put Option Strategies 
+50 put. By using the option strategy, the investor has nearly the same profit and loss 
+potential as the stock buyer, as shown in Table 21-1. The two right-hand columns of 
+the table compare the results of the option strategy with the results that would be 
+obtained by merely owning the stock at .50. 
+The table shows that the result of the option strategy is exactly $100 less than 
+the stock results for any price at expiration. Thus, the "synthetic" long stock and the 
+actual long stock have nearly the same profit and loss potentials. The reason there is 
+a difference in the results of the two equivalent positions lies in the fact that the 
+option strategist had to pay 1 point of time premium in order to set up his position. 
+This time premium represents the $100 by which the "synthetic" position underper­
+forms the actual stock position at expiration. Note that, with XYZ at 50, both the put 
+and the call are completely composed of time value premium initially. The synthetic 
+position consists of paying out 5 points of time premium for the call and receiving in 
+4 points of time premium for the put. The net time premium is thus a 1-point pay­
+out. 
+The reason one would consider using the synthetic long stock position rather 
+than the stock position itself is that the synthetic position may require a much small­
+er investment than buying the stock would require. The purchase of the stock 
+requires $5,000 in a cash account or $2,500 in a margin account (if the margin rate is 
+50%). However, the synthetic position requires only a $100 debit plus a collateral 
+requirement - 20% of the stock price, plus the put premium, minus the difference 
+between the striking price and the stock price. The balance, invested in short-term 
+funds, would earn enough money, theoretically, to offset the $100 paid for the syn­
+thetic position. In this example, the collateral requirement would be 20% of $5,000, 
+or $1,000, plus the $400 put premium, plus the $100 debit incurred by paying 5 for 
+the call and only receiving 4 for the put. This is a total of $1,500 initially. There is no 
+TABLE 21·1. 
+Synthetic long stock position. 
+XYZ Price at January 50 January 50 Total Option Long Stock 
+Expiration Call Result Put Result Result Result 
+40 -$500 -$600 -$1, 100 -$1,000 
+45 - 500 - 100 600 500 
+50 - 500 + 400 100 0 
+55 0 + 400 + 400 + 500 
+60 + 500 + 400 + 900 + 1,000