15.e Put-Call Parity
Introduction to Options
Discusses key concepts related to options:
Speculating
Hedging
Intrinsic Value
Example Review
Reviewed previous example:
Stock Price: $100
Put and Call Exercise Prices: $100
Premiums: Put = $3, Call = $4
Discussed various positions: Protective puts, covered calls, straddles, etc.
Homework Assignment
Task:
Analyze outcomes for:
Buying stock
Buying a put
Selling a call
Outcomes to analyze at different stock prices:
$120, $100, $80
Options for analysis:
Profits
Total values
Calculation of Outcomes
Profits Calculation
If stock price:
$120: Buy stock loss = -$20, Buy put profit = $17, Sell call profit = $4
Total profit = $1
$100: Buy stock loss = $0, Buy put profit = -$3, Sell call profit = -$16
Total profit = $-19
$80: Buy stock loss = $20, Buy put profit = -$3, Sell call profit = $0
Total profit = $-23
Total Values Calculation
Stock purchased at $100:
Value if stock goes to:
$80: Total value = $80 (Loss = -$20)
$100: Total value = $100 (No loss)
$120: Total value = $120 (Gain = $20)
Call and put values:
Put values at expiration:
$80 puts = $20, $100 puts = $0, $120 puts = $0
Call values at expiration:
$80 calls = $0, $100 calls = $0, $120 calls = $-20
Overall values yield:
Total at expiration: $100 no matter the outcome
Risk-Free Asset Creation
By creating a position of:
Buying stock
Buying put
Selling call
Outcome is consistent ($100), making it behave like a risk-free asset
Put-Call Parity
Definition and significance:
Parity exists at expiration; relationship between stock, put, and call.
Equation: Stock + Put = Call + Present Value of Exercise Price (K)
Conditions for Put-Call Parity:
Options must be on the same stock
Same exercise price for options
Same expiration date
Importance:
Fundamental to arbitrage opportunities
Supports replication strategies for investors
Future Discussions
Further exploration of:
Arbitrage implications
Replication strategies for higher-profile investors
These concepts will be discussed in upcoming videos.