Now in agreement...
You actually created an investment with three positions, the call, the put, and the cash. The combination of the call and the put made the same return as the stock minus the interest on the cash, which is exactly what I was trying to say. The interest on the cash is essentially the risk free rate of return I was talking about in my prior post, and is required to bring the return of the synthetic stock up to the return of the regular stock.
What your example is really doing is transfering the return on equity of somebody that owns the stock to the person purchasing the synthetic stock, and giving the stock owner a guaranteed risk free rate of return. There appears to be enough equity owners willing to live with the risk free rate of return that this strategy works.
Another way to observe the effects of the risk free rate of return is to look at a heavily traded option like the spx. You will find that the strike price at which the call and put prices are the same increases with longer expirations.
OK, with all this learning I am ready to take a shot at answering Elmers original question about strategies for options. First we break the options into two types, speculative and hedging. The hedging options are sold calls and purchased puts while the speculative options are purchased calls and sold puts.
What many investors should worry about is where their portfolio lies on the risk / return line. The higher the risk (volatility or variability) the higher return we expect. If you wish to increase your average return, and as a negative side effect increase the volatility of your portfolio, you should move into speculative options. You would tend to do this if you have a longer investment horizon. If you wish to decrease your volatility, and as a negative side effect reduce your average expected return, you should have positions in the hedging options. I still personally believe there are better ways to do this type of adjustment than by using options, but I suppose that is just a personal preference.
To reiterate my original position, which I have not changed...
If you randomly grab a handful of stocks, your average annual return will be about 10%. If you randomly grab a handful of options, your average annual return will about 0% minus commission and spread, but of course your investment will also be zero.
The key learning on top of my original position is if you grab options in a "non random" fashion you can do some useful things.
--Alan
