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