Dan, As I understand CR's post, the problem was how to short a stock when no shares were available to short, AMZN in the example. A synthetic short using options--writing a given call and buying a put--accomplishes the same thing as an ordinary short. The return is identical to a short position less the option bid-ask. The obvious limitation is that options expire whereas a patient short can wait without worrying about expiration, suggesting the farthest out options should be used for a synthetic short. Otherwise, it's the same as a short. If the stock tanks, the trade is essentially free, the call paid for the put.
A straight put is synthetically identical to a combination of shorting a stock and buying a call for protection against an unexpected upside move. Though giving loss protection against an adverse move, a put actually costs something. Obviously, the put only participates in a down move to the extent of its delta, say, $.48 to the dollar for a nearby at-the-money put, but it's obviously possible to buy a few more put contracts than you would have shorted underlying shares and adjust the position to get the same dollar return as a straight short for a given move in the underlying issue.
The choice of tactic, as you point out, has to do with one's risk tolerance.
Best,
Steve |
