Using Put to Call Parity on StocksUsing the put to call parity to gain the same returns on the options as you would have gotten had you just bought the stock can be done, and for less cost as well. So how does it work? It is done by buying and selling options calls and puts so that they give you the exact dollar gain that you would have had, had you have bought the stock. Confused? Here is my put to call parity example, and it uses this equation. Buying a Call + Selling a Put = Buying a Stock Let’s say you find a $40 stock. You buy the $40 call for $3 and sell the $40 put for $3. Since At the money calls and puts should cost around the same amount they cancel each other out. (spend $3 and make $3) Now let’s say the stock goes up to $50. Since you have the right to buy the stock at $40 you can exercise it and buy this $50 stock at $40 making $10, the same amount you would have made had you simply bought the stock. If it goes down to $30 then you have the obligation to then buy this $30 stock at $40 losing $10, or the same amount you would have lost had you bought the stock, Assumptions This assumes two things. 1. Puts and calls are equal. This assumes that the put and call are the exact same price and will cancel each other out. Factors such as demand and Bid, Ask price can skew them way off at times. But in general they should be around the same level, so the little difference will not affect the results too much. 2. Not selling options early Again options have multiple different factors that figure out the price. If you sell your options instead of exercising them it might be off a little. Other formulas There are many other formulas that go off of the same reasoning. They are. Buy Stock +Buy Put = Buy Call Short Stock + Buy call = Buy Put Short Stock + Wright Put = Wright Call |
