Chapter 21: Synthetic Stock Positions Created by Puts and Calls 327 
somewhat expensive also. Thus, if he is right about the bullish attitude on the stock, 
he owns a call that is more "fairly priced" because its cost was reduced by the amount 
of the put sale. 
BEARISHLY ORIENTED 
There is a companion strategy for the investor who is bearish on a stock. He could 
attempt to buy an out-of-the-money put, giving himself the opportunity for substan­
tial profits in a stock price decline, and could "finance" the purchase of the put by 
writing an out-of-the-money call naked. The sale of the call would provide profits if 
the stock stayed below the striking price of the call, but could cost him heavily if the 
underlying stock rallies too far. 
Example: With XYZ at 65, the bearish investor buys a February 60 put for 2 points, 
and simultaneously sells a February 70 call for 3 points. These trades bring in a cred­
it of 1 point, less commissions. The investor must collateralize the sale of the call. If 
XYZ should decline substantially by February expiration, large profits are possible 
because the February 60 put is owned. Even if XYZ does not perform as expected, 
but still ends up anywhere between 60 and 70 at expiration, the profit will be equal 
to the initial credit because both options will expire worthless. However, if the stock 
rallies above 70, unlimited losses are possible because there is a naked call at 70. 
Table 21-4 and Figure 21-2 show the results of this strategy at expiration. 
This is clearly an aggressively bearish strategy. The investor would like to own 
an out-of-the-money put for downside potential. In addition, he sells an out-of-the­
money call, normally for a price greater than that of the purchased put. The call sale 
TABLE 21-4. 
Bearishly split strikes. 
XYZ Price at February 60 February 70 Total 
Expiration Put Profit Call Profit Profit 
50 +$800 +$300 +$1, 100 
55 + 300 + 300 + 600 
60 - 200 + 300 + 100 
65 - 200 + 300 + 100 
70 - 200 + 300 + 100 
75 - 200 - 200 400 
80 - 200 - 700 900