I understand that the sale of the call finances the put. But if underlying goes to 103 at expiration, both the call and the put expire worthless, so profit = 103 - 100 = 3 $. What is wrong with my assessment?
For ease of discussion, let's ignore carry cost.
- Buy stock XYZ for $100
- Sell $105 call for $1
- Buy $105 put for $6
You have executed a conversion and your total cost is $105. No matter what the stock does, you'll get $105 for the position. If it drops, you'll exercise the put and receive $105 for your stock. If it rises, your short call is assigned and you'll sell your stock for $105. As stated in the article (dead link), there is zero risk and zero profit.
As noted in the other answer, Short Call + Long Put is equivalent to being short the stock. Since you are long the stock, adding the two option positions negates it. IOW, plus one minus one equals zero.
For future reference:
There are 6 basic synthetic positions relating to combinations of put options, call options and their underlying stock in accordance to the synthetic triangle:
Synthetic Long Stock = Long Call + Short Put
Synthetic Short Stock = Short Call + Long Put
Synthetic Long Call = Long Stock + Long Put
Synthetic Short Call = Short Stock + Short Put
Synthetic Short Put = Long Stock + Short Call
Synthetic Long Put = Short Stock + Long Call
And if you're really understand this, you'll be able to figure out why collared long stock is equivalent to a bullish vertical spread :->)