Example:

XYZ is at $13.75. This stock is a relatively new listing, but is a strong competitor in its industry.

Outlook:

Bullish on XYZ. You are expecting a 15% increase in the stock over the next six months as news of its industry position comes out. You want to establish a large (1,000 share) position over the short-term, but do not want to pay $13,750 capital cost at onset. You also want to keep as much upside as possible, and are willing to accept downside risk of stock.

Possible strategy: Synthetic Stock

Buy 10 June 12.50 calls at 2.25.
Sell 10 June 12.50 puts at 1.25.
Debit of $1 x 10 contracts or $1,000.

*All values shown are at the time of expiration.

At Expiration (06/18/05)

* Max Gain: Unlimited through expiration.
** Unchanged: Gain of $250.00
*** Break-even: XYZ at 13.50
**** Max Loss: $13,500 if XYZ declines to zero.

In Short:

Initial cost of $1,000 (plus margin deposit and commissions) establishes a "synthetic" stock position of 1,000 shares with unlimited upside potential through June expiration. Maximum risk ($13,500.00) is lower by $250.00 than if you had purchased the stock outright ($13,750.00). Unlike stock, options do not carry dividend or voting rights.