When P-C parity does not hold

Baozi

Baozi

Hello,

in my particular market (China) the P-C parity started breaking down during the past weeks.

In the beginning I could explain the small IV difference between call and put with the interest rates, but recently the divergence is becoming really wide. We are talking about calls at 14%IV and puts at 25%IV for the same strike.

On top of this, and especially for longer dated maturities, the ATM put IV is higher than the wings IV..

The only rational explanation I can think about is that 1)the market sentiment turned very bearish after the last tariff round and 2)it's very difficult to short stock, therefore nobody is able to arbitrage away the difference.

Any veteran here that went through similar scenarios? Or should I simply stop playing in a market where standard logic does not hold?
 
I see. I was also expecting to hear something along those lines.. however the most interesting/valuable thing for me would be hearing about other traders caught in a similar situation, with all the juicy details.. having the knowledge of why something is happening is fine, but knowing how to react is the real thing.
 
Robert Morse said:
I was talking about equities as there is no cost to short a future.
More...

I don't know whether the OP was referring to American / European exercise type options
... but p-c parity does not necessarily hold for American exercise type options ... that allow early exercise
 
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