37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 21: Synthetic Stock Positions Created by Puts and Calls 323
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initial difference between the stock price and the striking price. Of course, this col
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lateral requirement would increase if the stock fell in price, and would decrease if the
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stock rose in price, since there is a naked put. Also notice that buying stock creates a
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$5,000 debit in the account, whereas the option strategy's debit is $100; the rest is a
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collateral requirement, not a cash requirement.
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The effect of this reduction in margin required is that some leverage is obtained
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in the position. If XYZ rose to 60, the stock position profit would be $1,000 for a
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return of 40% on margin ($1,000/$2,500). With the option strategy, the percentage
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return would be higher. The profit would be $900 and the return thus 60%
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($900/$1,500). Of course, leverage works to the downside as well, so that the percent
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risk is also greater in the option strategy.
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The synthetic stock strategy is generally not applied merely as an alternative to
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buying stock. Besides possibly having a smaller profit potential, the option strategist
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does not collect dividends, whereas the stock owner does. However, the strategist is
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able to earn interest on the funds that he did not spend for stock ownership. It is
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important for the strategist to understand that a long call plus a short put is equiva
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lent to long stock. It thus may be possible for the strategist to substitute the synthet
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ic option position in certain option strategies that normally call for the purchase of
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stock
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SYNTHETIC SHORT SALE
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A position that is equivalent to the short sale of the underlying stock can be estab
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lished by selling a call and simultaneously buying a put. This alternative option strat
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egy, in general, offers significant benefits when compared with selling the stock short.
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Using the prices above - XYZ at 50, January 50 call at 5, and January 50 put at 4 -
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Table 21-2 depicts the potential profits and losses at January expiration.
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Both the option position and the short stock position have similar results: large
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potential profits if the stock declines and unlimited losses if the underlying stock rises
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in price. However, the option strategy does better than the stock position, because
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the option strategist is getting the benefit of the time value premium. Again, this is
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because the call has more time value premium than the put, which works to the
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option strategist's advantage in this case, when he is selling the call and buying the
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put.
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Two important factors make the option strategy preferable to the short sale of
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stock: (1) There is no need to borrow stock, and (2) there is no need for an uptick.
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When one sells stock short, he must first borrow the stock from someone who owns
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it. This procedure is handled by one's brokerage firm's stock loan department. If, for |