Rare arbitrage profit from call vs put prices: explain why not being taken?

[spindr0]

Quote from Option Trader:

In the event that the premium on the put price is greater than the premium on the call price (assuming same strike price and same expiration month), it presents a rare opportunity, i.e. instead of buying the stock, you can buy the calls and sell the puts (then you have the same potential of upside and same exposure to the downside)...

One other thing. The stock must be at or above the strike price for the above to be true. If the stock is below the strike, the put price will be greater than the call price because it's ITM. That's not an opportunity.

 

[Option Trader]

Quote from spindr0:

One other thing. The stock must be at or above the strike price for the above to be true. If the stock is below the strike, the put price will be greater than the call price because it's ITM. That's not an opportunity.

The point is the amount of the premium, even if out-of-the-money, and unless the stock & strike price are the same, either the call or the put is ALWAYS out-of-the money.

 

[spindr0]

Quote from Option Trader:

The point is the amount of the premium, even if out-of-the-money, and unless the stock & strike price are the same, either the call or the put is ALWAYS out-of-the money.

You missed the point completely.

The put premium being higher than the call premium for the same strike and same month isn't a rare oportunity. It's what happens any time the put is in the money by more than the carry cost.

 

[Option Trader]

Quote from spindr0:

You missed the point completely.

The put premium being higher than the call premium for the same strike and same month isn't a rare oportunity. It's what happens any time the put is in the money by more than the carry cost.

I thank you for your responses and concern, but what you're saying is incorrect. If the puts are in-the-money even by $.01, you hold the whole arbitrage oppty disappears??

That's simply not the case, rather you have to compare the out-of the-money premiums of the calls versus the out-of-$ premium of puts!!

 

[spindr0]

Quote from Option Trader:

I thank you for your responses and concern, but what you're saying is incorrect. If the puts are in-the-money even by $.01, you hold the whole arbitrage oppty disappears??

That's simply not the case, rather you have to compare the out-of the-money premiums of the calls versus the out-of-$ premium of puts!!

Not exactly .

I said that the put premium will be higher than the call premium for the same strike and same month any time the put is in the money by more than the carry cost. Calls will be higher than puts until the carry cost is covered (excepting special situations like the aforementioned dividends, corporate actions). The higher the borrow rate or the further out the month, the greater the carry cost and the more ITM that price will be. But it's still not an arb opportunity. It's just normal pricing.

Instead of running around in circles, post the stock name and strikes that you're looking at. I bet that someone will be able to figure out what you're missing. And don't worry about your rare opportunity. Market makers and floor traders are not dumb enough to let that fly and give retail traders like us a free lunch.

 

[rosy2]

whats the ticker?

you're saying this is not true. stock-strike = call -put

 

[Rodney King]

Quote from dcvtss:

Is it a hard to borrow? A lot of times these opportunities exist only if you can locate the shares...

We have a winner!

 

[Martinghoul]

spindr is right, IMHO...

It's most likely to be either a) a case of put-call parity not holding for an American option, 'cause of some special condition; b) you're effectively not calculating the fwd correctly, due to you not using the right cost of carry.

 

[Option Trader]

I thank everyone, but the point about the carry cost is very incorrect.

Reason 1: It's relevant to the February expiration as well (and even more so last week).

Reason 2: there is no need to short the stock, rather, for whoever wants to buy the stock, can simply buy the calls and sell the puts, and it achieves the same affect at $.10 cheaper.

 

[MTE]

Listen, the world of free money due to mispricing is long gone. The markets are made by computers and any mispricings are corrected instantly. If there is a mispricing that persists for days then you are missing some important piece of information, such as dividends, hard to borrow, non-standard option, etc.