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Strategies & Market Trends : Roger's 1997 Short Picks
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To: Brad Davies who wrote (7624)11/30/1997 1:51:00 PM
From: vegetarian   of 9285
 
>>Bill, thanks for your description of a "synthetic short". It seems to me though, that if you are bearish on a stock, you would still be better off simply selling the naked call. The downside is that your profit is limited to the premium, (while loss is theoretically unlimited as with any short). Your upside is the fact that you get that premium,(and don't have to give the MM two spreads) and the stock doesn't have to tank, but rather just tread water.
If you are fundamentally bearish on the stock, why not just sell the call?<<

The answer appears to be embedded in your post.
If one is fundamentally bearish on the stock, one would not expect the stock to just tread water but go down in the future and a synthetic short will enjoy the full gains from a downside move as compared to just selling the calls and pocketing the premium where the hope is that the stock just lingers and does not go up.

Looks like the technique of using a synthetic short looks at the call premium as a way of offsetting the cost of buying a put for a long time horizon and the main objective is gaining from the downside when the stock tanks in the timeframe bought.
Writing a nacked call looks at the call premium as the primary gain because of an expectation that the stock will not move up from the current price on the long time horizon and does not care if and by how much it may go down.
Two different philosophies, a synthetic short looks good if the stock is expected to go down whereas selling calls may make sense if the stock is expected to linger and not move much up or down.
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