CFA text says we can get risk free return from buy put and sell call if at same strike price, why we only get risk free return, can we get more than risk free return? thanks
Here the risk free return is not Treasury risk free rate (ie in the absolute %). The return, we get by this strategy is free of risk, why? I assume that we hold the underlying stock (hope the CFA text book also would have mentioned that), and we bought put and sold call at same strike price. Scenario 1: Stock price is below strike price: We will exercise the put option and get the strike price, maximum we’ll get is strike price Scenario 2: Stock price is above strike price: Since we sold the call, the call holder will exercise the call option and maximum we can get is only the strike price. As such, we don’t have both upside and down. Thus its risk free and we can’t get more than the lock return.
Thanks. but as you explain, it should be negative return say. stock price 50, strike price 40, stock price drop to 30 (1) Price drop to 30. buy put earns 10, but since stock price drop 20, negative -10. (2) Price rise to 60, stock earns 10, sell call loses 20, negative -10 even we consider sell call premium, say 5, we still achieve negative return(Stock price-strike)