34 lines
2.6 KiB
Plaintext
34 lines
2.6 KiB
Plaintext
Chapter 21: Synthetic Stock Positions Created by Puts and Calls 325
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Because of the advantages of the option position in not having to pay out the
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dividend and also having a slightly larger profit potential from the excess time value
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premium, it may often be feasible for the trader who is looking to sell stock short to
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instead sell a call and buy a put. It is also important for the strategist to understand
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the equivalence between the short stock position and the option position. He might
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be able to substitute the option position in certain cases when the short sale of stock
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is normally called for.
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SPLITTING THE STRIKES
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The strategist may be able to use a slight variation of the synthetic strategy to set up
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an aggressive, but attractive, position. Rather than using the same striking price for
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the put and call, he can use a lower striking price for the put and a higher striking
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price for the call. This action of splitting apart the striking prices gives him some
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room for error, while still retaining the potential for large profits.
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BULLISHLY ORIENTED
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If an out-of-the-money put is sold naked, and an out-of-the-money call is simultane
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ously purchased, an aggressive bullish position is established - often for a credit. If
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the underlying stock rises far enough, profits can be generated on both the long call
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and the short put. If the stock remains relatively unchanged, the call purchase will be
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a loss, but the put sale will be a profit. The risk occurs if the underlying stock drops
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in price, producing losses on both the short put and the long call.
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Example: The following prices exist: XYZ is at 53, a January 50 put is selling for 2,
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and a January 60 call is selling for 1. An investor who is bullish on XYZ sells the
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January 50 put naked and simultaneously buys the January 60 call. This position
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brings in a credit of 1 point, less commissions. There is a collateral requirement
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necessary for the naked put. If XYZ is anywhere between 50 and 60 at January
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expiration, both options would expire worthless, and the investor would make a small
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profit equal to the amount of the initial credit received. If XYZ rallies above 60 by
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expiration, however, his potential profits are unlimited, since he owns the call at 60.
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His losses could be very large if XYZ should decline well below 50 before expiration,
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since he has written the naked put at 50. Table 21-3 and Figure 21-1 depict the
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results at expiration of this strategy.
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Essentially, the investor who uses this strategy is bullish on the underlying stock
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and is attempting to buy an out-of-the-money call for free. If he is moderately wrong |