27 lines
1.8 KiB
Plaintext
27 lines
1.8 KiB
Plaintext
to buy the stock at the same strike price. It doesn’t matter what the strike
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price is. As long as the strike is the same for the call and the put, the trader
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will have a long position in the underlying at the shared strike at expiration
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when exercise or assignment occurs.
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The options in this example are 50-strike options. At expiration, the trader
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can exercise the call to buy the underlying at $50 if the stock is above the
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strike. If the underlying is below the strike at expiration, he’ll get assigned
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on the put and buy the stock at $50. If the stock is bought, whether by
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exercise or assignment, the effective price of the potential stock purchase,
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however, is not necessarily $50.
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For example, if the trader bought one 50-strike call at 3.50 and sold one
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50-strike put at 1.50, he will effectively purchase the underlying at $52
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upon exercise or assignment. Why? The trader paid a net of $2 to get a long
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position in the stock synthetically (3.50 of call premium debited minus 1.50
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of put premium credited). Whether the call or the put is ITM, the effective
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purchase price of the stock will always be the strike price plus or minus the
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cost of establishing the synthetic, in this case, $52.
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The question that begs to be asked is: would the trader rather buy the
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stock or pay $2 to have the same market exposure as long stock?
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Arbitrageurs in the market (with the help of the put-call parity) ensure that
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neither position—long stock or synthetic long stock—is better than the
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other.
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For example, assume a stock is trading at $51.54. With 71 days until
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expiration, 26.35 IV, a 5 percent interest rate, and no dividends, the 50-
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strike call is theoretically worth 3.50, and the 50-strike put is theoretically
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worth 1.50. Exhibit 6.7 charts the synthetic stock versus the actual stock
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when there are 71 days until expiration. |