market price (CMP) and earn the difference between CMP and initial price of stock.e. And hence, the pay-off for put option is max(X- S, t,0). A European put and call options both have an exercise price of 50 that expires in 120 days. Put-call parity keeps the prices of calls, puts and futures consistent with one another. This is the reason why you need to know everything before investing. Here, we are making adjustment in fiduciary call strategy. Lets back at our prime topic now. The short call and long call put option position would therefore leads to the stock being sold for 100/. Put-Call Parity Example, the above mentioned theorem can be elaborated with the below example. 100/- and underlying share price.e. With the help of this theory, options traders can determine the price of the option contracts. They sell the options contract at a higher price. According to this theory, the premium of a call option suggests a fair price for the put option. If you could sell the put at 8 and simultaneously buy the call for 2, along with selling the futures contract at 100, you could benefit from the lack of parity between the put, call and future. The traders are capable of using options to speculate the price movement and provide better opportunities for making profits. Along with this, the opportunities of arbitrage is present. If this is not the case, an arbitrage opportunity exists. Therefore, portfolio B will be worth the stock price (ST) at time. Just like the stock traders, options traders can have a short position on the contracts they assume will be devalued. This brings our net profit to 1 with the loss of 5 from the futures and loss of 2 from the call and the gain of 8 from the put. Fo(T 1r)T p0 c0 X 1 r)T, solving for Fo(T we acquire the equation for the forward price in terms of the call, put, and bond. This loss is mitigated by the 8 we received upon the sale of the put. Here, the equation would be adjusted with the present value of dividend. We have now seen that a put price of 8 created an arbitrage opportunity that generated a profit of 1 regardless of the market outcome. The put owner forfeited the 8 when he exercised his option. The put options is generally exercised by holder only if the stock price is less than the strike price. The fiduciary call consists of a long call and a long position in a zero-coupon bond: Value at inception c0 X 1 r)T. It also shows the three sided relationship between a call, a put and an underlying security.
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