290  •   The Intelligent Option Investor
preceding equation, we can see that the left side of the equation is levered 
(because it contains only options, and options are levered instruments), 
and the right side is unlevered. Obviously, then, the two cannot be exactly 
the same.
We can fix this problem by delevering the left side of the preceding 
equation. Any time we sell a put option, we have to place cash in a mar -
gin account with our broker. Recall that a short put that is fully margined 
is an unlevered instrument, so margining the short put should delever 
the entire option position. Let’s add a margin account to the left side and 
put $K in it:
C
K − PK + K = S
This equation simply says that if you sell a put struck at K and put $K 
worth of margin behind it while buying a call option, you’ll have the same 
risk, return, and leverage profile as if you bought a stock—just as in our 
big-picture diagram.
But this is not quite right if one is dealing with small differences. 
First, let’s say that you talk your broker into funding the margin ac-
count using a risk-free bond fund that will pay some fixed amount of 
interest over the next year. To fund the margin account, you tell your 
broker you will buy enough of the bond account that one year from 
now, when the put expires, the margin account’s value will be exactly 
the same as the strike price. In this way, even by placing an amount less 
than the strike price in your margin account originally, you will be able 
to fulfill the commitment to buy the stock at the strike price if the put 
expires in the money (ITM). The amount that will be placed in margin 
originally will be the strike price less the amount of interest you will 
receive from the risk-free bond. In mathematical terms, the preceding 
equation becomes 
C
K − PK + (K – Int) = S
Now all is right with the world. For a non-dividend-paying stock, this fully 
expresses the technical definition of put-call parity.
However, because we are talking about dividend arbitrage, we have to 
think about how to adjust our equation to include dividends. We know that 
a call option on a dividend-paying stock is worth less because the dividend