# Put call parity

DESCRIBE IT AND HOW YOU WOULD ARBITRAGE OFF IT. 90 SECONDS

put call parity is the relation ship of the put to the call in the equation C + X/e^rt=P + S0…the two sides of the equation must be equal or either the put of the call is cheap relative to the other…the arb would then be to buy the cheap option, short the other (which is defacto expensive relative to the cheap) and take an off setting position in the underlying, i.e. So, if the call is cheap to the put, buy the call, short the put and short the stock and with the procedes of the stock sale buy the risk free asset…then at expiration you will own the stock synthetically slightly cheaper than where you sold it once you factor in the interest you earned owning a risk free bond. does that make sense? When i was an option market maker i would end up with long call short put positions on the same strike all the time…and i would simply know that there was no movement risk because long call short put short stock is a delta neutral position, as is the opposite, long put long stock short call…all you have is interest rate and dividend movement… hope that helps

petetini Wrote: ------------------------------------------------------- > put call parity is the relation ship of the put to > the call in the equation C + X/e^rt=P + S0…the > two sides of the equation must be equal or either > the put of the call is cheap relative to the > other…the arb would then be to buy the cheap > option, short the other (which is defacto > expensive relative to the cheap) and take an off > setting position in the underlying, i.e. > > So, if the call is cheap to the put, buy the call, > short the put and short the stock and with the > procedes of the stock sale buy the risk free > asset…then at expiration you will own the stock > synthetically slightly cheaper than where you sold > it once you factor in the interest you earned > owning a risk free bond. > > does that make sense? When i was an option > market maker i would end up with long call short > put positions on the same strike all the > time…and i would simply know that there was no > movement risk because long call short put short > stock is a delta neutral position, as is the > opposite, long put long stock short call…all > you have is interest rate and dividend > movement… > > hope that helps good answer = so "delta nuetral = is synononmous with parity ???

plug the price of call and put option into the call-put parity formula if the formula doesn’t hold, short the overpriced and long the underpriced (the overpriced and underpriced are relative to each other)

Delta is the sensitivity of the call price at movement of the underlying. It is an hedging strategy in order to make the call “neutral” from movement of the underlying.

strangedays Wrote: ------------------------------------------------------- > Delta is the sensitivity of the call price at > movement of the underlying. It is an hedging > strategy in order to make the call “neutral” from > movement of the underlying. thanks, I need to go over the greeks.

daj224 Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > Delta is the sensitivity of the call price at > > movement of the underlying. It is an hedging > > strategy in order to make the call “neutral” > from > > movement of the underlying. > > > thanks, I need to go over the greeks. Dude, greeks is level II I think…lets pass level I first and we will see greeks in L II