Derivatives**Option Binomial MOdel*******


When the Put Option is Overpriced ,to take advantage of the arbitrage ,we are are selling the put Option & at the same time Shorting the Undelying Stock, whereas in the case of Call Option(Overpriced) we are Selling the Call Option & going Long on the Stock ?

Can anyone Explain why we are shorting the Stock in the case of Put Option.

Take a look at put-call parity:

p + S = c + PV(X)

If you solve for the put price, you get,

p = c + PV(X) – S

If the put is overpriced, then you buy the right side (buy a call, buy a bond, sell the stock) and sell the put. If the put is underpriced, then you buy the put, sell a call, sell a bond, and buy the stock.

Thank you Magician Sir…Got the Concept

Good to hear.

You’re quite welcome.