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+324 Part Ill: Put Option Strategies 
+TABLE 21-2. 
+Synthetic short sale position. 
+XYZ Price at January 50 January 50 Total Option Short Stock 
+Expiration Coll 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 
+some reason, no one who owns the stock wants to loan it out, then a short sale can­
+not be executed. In addition, both the NYSE and NASDAQ require that a stock 
+being sold short must be sold on an uptick. That is, the price of the short sale must 
+be higher than the previous sale. This rule was introduced (for the NYSE) years ago 
+in order to prevent traders from slamming the market down in a "bear raid." 
+With the option "synthetic short sale" strategy, however, one does not have to 
+worry about either of these factors. First, calls can be sold short at will; there is no 
+need to borrow anything. Also, calls can be sold short (and puts bought) even though 
+the underlying stock might be trading on a minus tick (a downtick). Many profes­
+sional traders use the "synthetic short sale" strategy because it allows them to get 
+equivalently short the stock in a very timely manner. If one wants to short stock, and 
+if he has not previously arranged to borrow it, then some time is wasted while one's 
+broker checks with the stock loan department in order to make sure that the stock 
+can indeed be borrowed. 
+There is a caveat, however. If one sells calls on a stock that cannot be borrowed, 
+then he must be sure to avoid assignment. For if one is assigned a call, then he too 
+will be short the stock. If the stock cannot be borrowed, the broker will buy him in. 
+Thus, in situations in which the stock might be difficult to borrow, one should use a 
+striking price such that the call is out-of-the-money when sold initially. This will 
+decrease, but not eliminate, the possibility of early assignment. 
+Leverage is a factor in this strategy also. The short seller would need $2,500 to 
+collateralize this position, assuming that the margin rate is 50%. The option strategist 
+initially only needs 20% of the stock price, plus the call price, less the credit received, 
+for a $1,400 requirement. Moreover, one of the major disadvantages that was men­
+tioned with the synthetic long stock position is not a disadvantage in the synthetic 
+short sale strategy: The option trader does not have to pay out dividends on the 
+options, but the short seller of stock must.