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.