Chapter 21: Synthetic Stock Positions Created by Puts and Calls 325 
Because of the advantages of the option position in not having to pay out the 
dividend and also having a slightly larger profit potential from the excess time value 
premium, it may often be feasible for the trader who is looking to sell stock short to 
instead sell a call and buy a put. It is also important for the strategist to understand 
the equivalence between the short stock position and the option position. He might 
be able to substitute the option position in certain cases when the short sale of stock 
is normally called for. 
SPLITTING THE STRIKES 
The strategist may be able to use a slight variation of the synthetic strategy to set up 
an aggressive, but attractive, position. Rather than using the same striking price for 
the put and call, he can use a lower striking price for the put and a higher striking 
price for the call. This action of splitting apart the striking prices gives him some 
room for error, while still retaining the potential for large profits. 
BULLISHLY ORIENTED 
If an out-of-the-money put is sold naked, and an out-of-the-money call is simultane­
ously purchased, an aggressive bullish position is established - often for a credit. If 
the underlying stock rises far enough, profits can be generated on both the long call 
and the short put. If the stock remains relatively unchanged, the call purchase will be 
a loss, but the put sale will be a profit. The risk occurs if the underlying stock drops 
in price, producing losses on both the short put and the long call. 
Example: The following prices exist: XYZ is at 53, a January 50 put is selling for 2, 
and a January 60 call is selling for 1. An investor who is bullish on XYZ sells the 
January 50 put naked and simultaneously buys the January 60 call. This position 
brings in a credit of 1 point, less commissions. There is a collateral requirement 
necessary for the naked put. If XYZ is anywhere between 50 and 60 at January 
expiration, both options would expire worthless, and the investor would make a small 
profit equal to the amount of the initial credit received. If XYZ rallies above 60 by 
expiration, however, his potential profits are unlimited, since he owns the call at 60. 
His losses could be very large if XYZ should decline well below 50 before expiration, 
since he has written the naked put at 50. Table 21-3 and Figure 21-1 depict the 
results at expiration of this strategy. 
Essentially, the investor who uses this strategy is bullish on the underlying stock 
and is attempting to buy an out-of-the-money call for free. If he is moderately wrong