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