To investors who expect a deeper decline, we suggest another strategy: a synthetic put
, which provides the same attractive features as a synthetic call, but for a different market outlook.
The synthetic put option has the following tax items.
To recap, the synthetic call option will produce interest expense plus gain or loss from stock trading, and the synthetic put will produce interest income plus gain or loss from short selling.
Bifurcation of Call Option -- Sum (Not Future Value) of Tax Items Mean Interest Expense on Synthetic Call ($6.28) Mean Net Gain from Stock Trading on Synthetic Call $10.54 Mean Difference between Synthetic and True Call ($0.00) Mean Gain on True Call (Sum of Above) $4.26 Bifurcation of Put Option -- Sum (Not Future Value) of Tax Items Mean Interest Income on Synthetic Put $4.79 Mean Net Loss from Short Selling on Synthetic Put ($3.37) Mean Difference between Synthetic and True Put ($0.01) Mean Gain on True Put (Sum of Above) $1.41
Analysis of Put Option Measured Over 2000 Simulations Mean of Future Value Mean of Sum Difference (Tax-Policy (Current-Law (Current Law Tax Items from Synthetic Put Ideal) Deferral) Less Ideal) Interest Income $5.42 $4.79 ($0.63) Net Loss from Short Selling ($3.95) ($3.37) $0.58 TOTAL $1.47 $1.42 ($0.05)