When P-C parity does not hold

[Robert Morse]

Bob

You are confusing non-arbitrage with put-call pariy.

We agree that markets are efficiently priced and there are few ( if any ) arbitrage opportunities arising from option mis-pricing.

Just put your math where your mouth is ... should be simple for a man with your resources to show that put-call parity holds for American Style options with dividends before expiry

Pick any example you want !

Cheers
James

I'm not confusing anything and very confident in my knowledge and comments. Don't you think it is interesting with thousands of eyes on these threads, no one has agreed with you? I'm happy to have a quick call, but this is not helping you understand and I find that I'm repeating myself.

 

[Alexpung]

put call parity just means you can construct a call with a put and underlying and vice versa, it doesn't mean risk and carrying cost does not need to be priced in.

Kind of silly to say put call parity does not hold if an option is priced differently because of the dividend.

 

[Robert Morse]

put call parity just means you can construct a call with a put and underlying and vice versa, it doesn't mean risk and carrying cost does not need to be priced in.

Kind of silly to say put call parity does not hold if an option is priced differently because of the dividend.

Put-call parity means if you calculate the current price of the conversion and reversal, they match closely with current interest rates to hold long stock or be short stock and include dividends and possible early assignment.

Conversion= Long Stock, Short call, long puts on the same line.
Reversal is the other side.

If these are out of line and you can easily make a profit from the miss-pricing, you would execute that trade until they are inline. As everyone has another cost basis, there are times when a customer can do a trade with a MM/Firm and both make/save money. That does not mean there is not P-C parity.

 

[ironchef]

this is not helping you understand and I find that I'm repeating myself.

You are wasting your time.

He just want you to agree with him that put call parity doesn't hold and you can print money trading it. Why don't you just let him print money?

 

[tommcginnis]

You are wasting your time.

He just want you to agree with him that put call parity doesn't hold and you can print money trading it. Why don't you just let him print money?

This reminds me of Efficient Market Theory -- which never holds up.
"Yes, it does."
No, it doesn't.
"It absoLUTEly does."
No, it really, honestly, doesn't.
"YES, IT DOES!!"
Okay, you're right: trade it.
"What??"



["But, like, I thought you were all Ivory Tower and everything??" I *am*, bro. I *am*. But the Ivory Tower has stairs; let's you be grounded.]

 

[Baozi]

A simple question I asked became a 7 page thread, wow..

So, to put it in layman terms, P-C always holds because long underlying = short P + long C +extra fat ( divs, interest rates, cost of carry etc..).

That extra fat will always be equal to the difference between the equation terms, so in a certain sense I'm wondering if PC is really something that exists or if it's a construct that we need to have in place to satisfy the no arbitrage/efficient market condition. But is it really so? All the time? Could it be that somebody sometimes is able to steal some extra fat?

 

[jamesbp]

I'm not confusing anything and very confident in my knowledge and comments. Don't you think it is interesting with thousands of eyes on these threads, no one has agreed with you? I'm happy to have a quick call, but this is not helping you understand and I find that I'm repeating myself.

We can agree to disagree whether put-call parity holds for American Options
... but I rest my case with an extract from John Hull's "Options Futures and Other Derivatives"

#1 Put-Call parity only holds for European Options

#2 Put-Call parity does not hold for American Options

 

[ironchef]

Hull: However, it is possible to use arbitrage arguments to obtain upper and lower bounds.

And for me as a retail, I cannot make $ because the upper and lower bounds are so close.

It is like early exercise, not worth my effort.

And this is my final post on this subject since I am just a pleb.

 

[tommcginnis]

#2 Put-Call parity does not hold for American Options
View attachment 207878

"...However, it is possible to use arbitrage arguments to obtain upper and lower bounds for the difference between the price of an American call and the price of an American put." [Hull, as above.]

I know -- you missed this part. And missed that arbitrage arguments were not present in Hull's simplification. JUST LIKE EMH models that assume instantaneous dispersion of information -- so, no need for Information Theory or dispersion models or adoption models or any of that other, silly, rot. Just set those arguments too, to zero.

Til you have to trade it.

 

[ironchef]

JUST LIKE EMH models that assume instantaneous dispersion of information -- so, no need for Information Theory or dispersion models or adoption models or any of that other, silly, rot. Just set those arguments too, to zero.

Til you have to trade it.

Can you run those by me again?