21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
Put-Call Parity Essentials
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Before the creation of the Black-Scholes model, option pricing was hardly
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an exact science. Traders had only a few mathematical tools available to
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compare the relative prices of options. One such tool, put-call parity, stems
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from the fact that puts and calls on the same class sharing the same month
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and strike can have the same functionality when stock is introduced.
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For example, traders wanting to own a stock with limited risk can buy a
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married put: long stock and a long put on a share-for-share basis. The
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traders have infinite profit potential, and the risk of the position is limited
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below the strike price of the option. Conceptually, long calls have the same
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risk/reward profile—unlimited profit potential and limited risk below the
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strike. Exhibit 6.1 is an overview of the at-expiration diagrams of a married
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put and a long call.
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EXHIBIT 6.1 Long call vs. long stock + long put (married put).
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Married puts and long calls sharing the same month and strike on the
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same security have at-expiration diagrams with the same shape. They have
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the same volatility value and should trade around the same implied
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volatility (IV). Strategically, these two positions provide the same service to
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a trader, but depending on margin requirements, the married put may
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require more capital to establish, because the trader must buy not just the
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option but also the stock. |