Think Twice before Buying Long Puts by Themselves

[poopy]

@taowave
Your comment about calls being priced to infinity is actually correct. Option pricing theory has to use infinity as it cannot make a judgment on the highest possible price. That's why a put and a call at the same strike price will not be the same price when the stock trades exactly on that strike. The call will be slightly higher. The difference is small, perhaps to several decimal points, but it is there. The point is that a put will profit all the way to a stock price of zero (however unlikely) and that you can often benefit more from a bear put spread (which is designed to profit from a small but more likely decline) than a long put by itself, which can make more money from a more substantial decline in stock price but which rarely occurs.

By Richard Lehman

lol so your contention is that the Jan25 ATM call, below, is higher prem than the same-strike put because of unlimited upside in long calls and delimited in puts (bound to zero)?

You train the PMs at parallax?

 

[poopy]

In the pic the calls are 1635 x 1651
Puts are 958 x 971
Index 17989
Jan 2025 18000 strike

Live Hanweck data, and posted a minute or so after the screenshot was taken.

thx

 

[newwurldmn]

so you are saying that buying a put and a share of stock vs selling a call will be an arbitrage because the market prices this “infinity risk”

@taowave if you look at the near-term implied volatilities of puts vs. calls on a stock that is about to pay a dividend, you will often find that the IVs show as higher for puts. That is because the Black-Scholes formula does not consider dividends. So, unless the formula is adjusted for a dividend, the formula ignores the dividend when calculating theoretical value. That will make the put appear to have a higher IV than the call and can affect delta calculations as well.

Your comment about calls being priced to infinity is actually correct. Option pricing theory has to use infinity as it cannot make a judgment on the highest possible price. That's why a put and a call at the same strike price will not be the same price when the stock trades exactly on that strike. The call will be slightly higher. The difference is small, perhaps to several decimal points, but it is there. The point is that a put will profit all the way to a stock price of zero (however unlikely) and that you can often benefit more from a bear put spread (which is designed to profit from a small but more likely decline) than a long put by itself, which can make more money from a more substantial decline in stock price but which rarely occurs.

By Richard Lehman

 

[poopy]

so you are saying that buying a put and 100 shares of stock vs selling a call will be an arbitrage because the market prices this “infinity risk”

Edited your last.

Go arbitrage that $70K in free monies in the NDX out to Jan.

ET is mindblowing.

 

[newwurldmn]

Edited your last.

Go arbitrage that $70K in free monies in the NDX out to Jan.

ET is mindblowing.

I thought about clarifying because this is ET and someone will only think in listed terms.

I bought ivol data from 2000 to 2010. At the time they seemed to have a handle on what they were selling. These threads are scary though.