36 lines
2.4 KiB
Plaintext
36 lines
2.4 KiB
Plaintext
322 Part Ill: Put Option Strategies
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50 put. By using the option strategy, the investor has nearly the same profit and loss
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potential as the stock buyer, as shown in Table 21-1. The two right-hand columns of
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the table compare the results of the option strategy with the results that would be
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obtained by merely owning the stock at .50.
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The table shows that the result of the option strategy is exactly $100 less than
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the stock results for any price at expiration. Thus, the "synthetic" long stock and the
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actual long stock have nearly the same profit and loss potentials. The reason there is
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a difference in the results of the two equivalent positions lies in the fact that the
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option strategist had to pay 1 point of time premium in order to set up his position.
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This time premium represents the $100 by which the "synthetic" position underper
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forms the actual stock position at expiration. Note that, with XYZ at 50, both the put
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and the call are completely composed of time value premium initially. The synthetic
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position consists of paying out 5 points of time premium for the call and receiving in
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4 points of time premium for the put. The net time premium is thus a 1-point pay
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out.
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The reason one would consider using the synthetic long stock position rather
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than the stock position itself is that the synthetic position may require a much small
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er investment than buying the stock would require. The purchase of the stock
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requires $5,000 in a cash account or $2,500 in a margin account (if the margin rate is
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50%). However, the synthetic position requires only a $100 debit plus a collateral
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requirement - 20% of the stock price, plus the put premium, minus the difference
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between the striking price and the stock price. The balance, invested in short-term
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funds, would earn enough money, theoretically, to offset the $100 paid for the syn
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thetic position. In this example, the collateral requirement would be 20% of $5,000,
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or $1,000, plus the $400 put premium, plus the $100 debit incurred by paying 5 for
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the call and only receiving 4 for the put. This is a total of $1,500 initially. There is no
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TABLE 21·1.
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Synthetic long stock position.
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XYZ Price at January 50 January 50 Total Option Long Stock
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Expiration Call 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 |