The strategy combines two option positions: short a call option and long a put option with the same strike and expiration. The net result simulates a comparable short stock position’s risk and reward. The principal differences are the time limitation imposed by the term of the options, the absence of the large initial cash inflow that a short sale would produce, and the absence of the practical difficulties and obligations associated with short sales.
If assigned, the investor who doesn’t take further steps to cover ends up with an actual short stock position.
Looking for a decline in the stock’s price during the term of the options.
Since the strategy’s term is limited, the longer-term outlook for the stock isn’t as critical as for, say, an outright short stock position.
However, the difficulty of pinpointing the exact timing and sequence of a downturn, just before an upturn, suggests it is not an optimal strategy for a long-term bullish investor.
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