Quick question: is selling call = shorting call = - call in put call parity. That’s the way I thought. Why selling call equal buy put + buy put and short bond?
Anyone?
Hi, didn’t really understand your question but the put-call parity relationship is:
Call + Bond = Stock + Put,
To replicate a call, you just re-arrange the equation to give
Call = Stock + Put - Bond
All you’ve done is subtract the bond from both sides, hope this helps.
Good luck!
if the market value of the call is greater than what i have calculated via put call parity, the call is overvalued.
Call = $12, put = $5 according to put call equation
Call = $15, for a put of $5 acc to market (mkt)
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Then call is overvalued and simultaneously, put is underavlued because for a put value of $5, the call value acc to mkt > put call equation value. Hence i will short a call & buy a put.
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I will benefit from my position above if the stock price decreases below the exercise price. Hence i need to protect my self in case the share price increases above the strike price. So i go long the underlying share.
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So with the proceeds of selling the call and issuing a bond with an exercise price of X, i will buy a put and share today. and invest the excess money @ the risk free rate
If the price of the share goes above the X, the put goes worth less, the counterparty will exercise the call and pay me the exercise price for the share i hold and i will repay the bond with the interest thus making a profit
If the price of share is less than X, the counter party will not exercise the call, i will exercise the put and sell the share i have @ the exercise price, i will use the proceeds to pay the bond with interest & make profit.
Should be sell put actually…
Let’s look at the payoff.
short call means you lose money if the stock goes up above excercise, you don’t gain money if it goes down below excercise.
You get a sum in the beginning (Cash for call). If the stock goes up, above the excercise/bond price you lose money equal to the excercise/stock price. If it goes down below the excercise price you don’t get anything back at all. The only way that it could happen is if you sold a put and if the put is set as the same excercise price as the call, then when the stock goes down, you paying out the amount it goes down by, but since you’re shorting the stock the two should balance out.
Just use the call formula, but have the other side all negative. C = P + S - B ==> - C = -P -S + B