45 lines
1.3 KiB
Plaintext
45 lines
1.3 KiB
Plaintext
288 • The Intelligent Option Investor
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20
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5/18/2012 5/20/2013
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40
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60
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80
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100
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120Stock Price
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140
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160
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180
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200
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-
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20
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5/18/2012 5/20/2013
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40
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60
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80
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100
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120Stock Price
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140
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160
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180
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200
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GREENGREEN
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REDRED
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If you say, “Nothing, ” you are practically right but technically
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wrong. The image on the left is actually the risk-reward profile of a pur -
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chased call option struck at $50 paired with a sold put option struck at
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$50. The image on the right is the risk-reward profile of a stock trading
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at $50 per share.
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This simple comparison is the essence of put-call parity. The parity
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part of put-call parity just means that accepting downside exposure by sell-
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ing a put while gaining upside exposure by buying a call is basically the
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same thing as accepting downside exposure and gaining upside exposure
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by buying a stock.
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What did I say? It is laughably trivial. Now let’s delve into the details
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of how the put-call parity relationship can be used to help decide whether
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to exercise a call option or not (or whether the call option you sold is likely
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to be exercised or not).
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Dividend Arbitrage and Put-call Parity
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Any time you see the word arbitrage , the first thing that should jump to
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mind is “small differences. ” Arbitrage is the science of observing small dif-
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ferences between two prices that should be the same (e.g., the price of IBM |