Buy one 71-day 50 call at 3.50
Sell one 71-day 50 put at 1.50
Sell 100 shares at 51.54
The trader establishes a short position in the stock at $51.54 and a long
synthetic stock position effectively at $52.00. He buys the stock
synthetically at $0.46 over the stock price, again assuming the trade can be
executed at fair value. With the reversal, the trader has a bullish position on
interest rates, which is indicated by a positive rho.
In this example, the rho for this position is 0.090. If interest rates rise one
percentage point, the synthetic stock (which the trader is long) gains nine
cents in value relative to the stock. The short stock rebate on the short stock
leg earns more interest at a higher interest rate. If rates fall one percentage
point, the synthetic long stock loses $0.09. The trader earns less interest
being short stock given a lower interest rate.
With the reversal, the fact that the put can be exercised early is a risk.
Since the trader is short the put and short stock, he hopes not to get
assigned. If he does, he misses out on the interest he planned on collecting
when he put on the reversal for $0.46 over.