17 lines
1.4 KiB
Plaintext
17 lines
1.4 KiB
Plaintext
a,,pter 15: Put Option Basics 255
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option market, it was often stated that the reason for this relationship was that the
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demand for calls was larger than the demand for puts. This may have been partially
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true, but certainly it is no longer true in the listed option targets, where a large sup
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ply of both listed puts and calls is available through the OCC. Arbitrageurs again
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serve a useful function in increasing supply and demand where it might not other
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wise exist. The second fact concerning the relationship of puts and calls is that a put
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option will lose its time value premium much more quickly in-the-money than a call
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option will (and, conversely, a put option will generally hold out-of-the-money time
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value premium better than a call option will). Again, the conversion and reversal
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processes play a large role in this price action phenomenon of puts and calls. Both of
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these facts have to do with the carrying costs involved in the conversion.
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In the chapter on Arbitrage, exact details of conversions and reversals will be
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spelled out, with specific reasons why these procedures affect the relationship of put
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and call prices as stated above. However, at this time, it is sufficient for the reader to
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understand that there is an arbitrage process that is quite widely practiced that will,
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in fact, make true the foregoing relationships between puts and calls. |