John,
What Paul is doing is simulating purchase of CSCO equity with no money down. In other words, the profit profile is identical to buying CSCO commons at 100% margin. For example,
1. Simulated equity buy with no money down, 10 calls bought and 10 puts sold, strike 100 for both:
CSCO at 50 on expirey, calls valued at 0, puts at -50, net loss -50 * 10 * 100 = 50000.
CSCO at 150 on expirey, calls valued at 50, puts at 0, net gain 50 * 10 * 100 = 50000.
2. Equity buy on 100% margin, loan 100000, 1000 CSCO commons bought.
case 1, net loss = -100000 + 50 * 10000 = 50000, ignoring interest.
case 2, net gain = -100000 + 150 * 10000 = 50000, ignoring interest.
The beauty of the simulated strategy is avoiding margin altogether hence no margin interest, a saving of 10000 at least.
-Apratim. |
