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