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Technology Stocks : America On-Line: will it survive ...?
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To: Steve Robinett who wrote (9071)3/26/1998 7:19:00 PM
From: Jason Cogan  Read Replies (1) of 13594
 
Steve:

Writing calls by itself is a proxy for a short position. I never said that it behaves exactly like shorting the stock. It has a different risk reward profile, and one that I often like better.

The reason I call it a "synthetic short" is because of the following. When shorting a stock, the speculator knows both the price of the short and the amount of shares he is short. He also begins to win/lose dollar for dollar.

When writing a call, the investor knows the price of the short, but in actuality, the amount of shares remains uncertain. At higher prices, the investor is short the full amount of the contracts. At lower prices, it's as if he shorted fewer shares. How many fewer?

Simply take the premium received divided by the ending differential between strike and expiration price. Whatever the number, that's the number of shares you've synthetically shorted.

Hope this helps,

Jason
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