27 lines
1.4 KiB
Plaintext
27 lines
1.4 KiB
Plaintext
Put-Call Parity
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Put and call values are mathematically bound together by an equation
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referred to as put-call parity. In its basic form, put-call parity states:
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where
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c = call value,
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PV(x) = present value of the strike price,
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p = put value, and
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s = stock price.
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The put-call parity assumes that options are not exercised before
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expiration (that is, that they are European style). This version of the put-call
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parity is for European options on non-dividend-paying stocks. Put-call
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parity can be modified to reflect the values of options on stocks that pay
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dividends. In practice, equity-option traders look at the equation in a
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slightly different way:
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Traders serious about learning to trade options must know put-call parity
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backward and forward. Why? First, by algebraically rearranging this
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equation, it can be inferred that synthetically equivalent positions can be
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established by simply adding stock to an option. Again, a put is a call; a call
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is a put.
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and
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For example, a long call is synthetically equal to a long stock position
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plus a long put on the same strike, once interest and dividends are figured
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in. A synthetic long stock position is created by buying a call and selling a
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put of the same month and strike. Understanding synthetic relationships is
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intrinsic to understanding options. A more comprehensive discussion of
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synthetic relationships and tactical considerations for creating synthetic
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positions is offered in Chapter 6. |