37 lines
2.4 KiB
Plaintext
37 lines
2.4 KiB
Plaintext
324 Part Ill: Put Option Strategies
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TABLE 21-2.
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Synthetic short sale position.
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XYZ Price at January 50 January 50 Total Option Short Stock
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Expiration Coll Result Put Result Result Result
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40 +$500 +$600 +$1, 100 +$1,000
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45 + 500 + 100 + 600 + 500
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50 + 500 - 400 + 100 0
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55 0 - 400 400 500
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60 - 500 - 400 900 - 1,000
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some reason, no one who owns the stock wants to loan it out, then a short sale can
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not be executed. In addition, both the NYSE and NASDAQ require that a stock
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being sold short must be sold on an uptick. That is, the price of the short sale must
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be higher than the previous sale. This rule was introduced (for the NYSE) years ago
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in order to prevent traders from slamming the market down in a "bear raid."
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With the option "synthetic short sale" strategy, however, one does not have to
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worry about either of these factors. First, calls can be sold short at will; there is no
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need to borrow anything. Also, calls can be sold short (and puts bought) even though
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the underlying stock might be trading on a minus tick (a downtick). Many profes
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sional traders use the "synthetic short sale" strategy because it allows them to get
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equivalently short the stock in a very timely manner. If one wants to short stock, and
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if he has not previously arranged to borrow it, then some time is wasted while one's
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broker checks with the stock loan department in order to make sure that the stock
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can indeed be borrowed.
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There is a caveat, however. If one sells calls on a stock that cannot be borrowed,
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then he must be sure to avoid assignment. For if one is assigned a call, then he too
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will be short the stock. If the stock cannot be borrowed, the broker will buy him in.
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Thus, in situations in which the stock might be difficult to borrow, one should use a
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striking price such that the call is out-of-the-money when sold initially. This will
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decrease, but not eliminate, the possibility of early assignment.
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Leverage is a factor in this strategy also. The short seller would need $2,500 to
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collateralize this position, assuming that the margin rate is 50%. The option strategist
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initially only needs 20% of the stock price, plus the call price, less the credit received,
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for a $1,400 requirement. Moreover, one of the major disadvantages that was men
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tioned with the synthetic long stock position is not a disadvantage in the synthetic
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short sale strategy: The option trader does not have to pay out dividends on the
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options, but the short seller of stock must. |