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Friday, November 21, 2003 12:02:05 AM
Doug's example performs 'exactly' the same as buying the stock, except with the added benefit that you don't actually buy the stock until the option expires, and then you don't even do that if the stock has gone up. During this entire time your cash can be earning money in a money market, or better yet if you have margin power, you could invest that cash into another stock (be careful you can get burned doing this if you get assigned at expiration).
The synthetic stock is illustrated best if the stock price exactly lines up with one of the strike prices at the time you perform it. A hypothetical example, where AMD is exactly at $16. At this price you write 100 December 16 puts for $.75 for a grand total of $7500, and then you buy 100 December 16 calls for the same $.75 for a total of $7500 using the $7500 from the put write you just did. You cash position has not changed. From this point on your return will be exactly the same as if you purchased 10000 shares. The reason this works is the time values of the 2 options cancel each other out regardless of the stock price. What is left is the underlying value of the options which are covering 10000 shares.
The catch?
1. you'll pay more in commissions
2. you can technically get assigned the shares at any time, but this never happens (anyone ever get assigned before the expiration?)
The benefit?
1. you can let the cash earn a nice 4-5% in the meantime until expiration.
In the above example, you would need $160000 in cash (or margin power). If you did the strategy with 1 year out options, you would make $8000 in interest for that year (assuming you had cash). The extra commissions would run you about $500. You could do this quarterly and still come out ahead.
You can combine different strike prices to come up with a nearly infinite set of ways to make a play with options.
You zero sum argument is way off, but I see we're not going to connect here. I'll try to explain why if you want me to, or we can just drop it.
HailMary
HailMary
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