← InstitutionalLesson 17 · 5:02
Put-call parity, boxes and financing
Summary
You can state put-call parity and check it on real SPX pairs, including the gap that dividends leave. You can explain why a box spread is a loan with an interest rate, why bid-ask spreads change that rate a lot, and what conversions and reversals are.
Key terms
- put-call parity
- The rule that a call minus a put at one strike equals the stock minus the strike's value today, less expected dividends.
- present value
- What money paid later is worth today, a little less because cash today can earn interest meanwhile.
- dividend
- Cash that some companies pay out to the people who own their shares.
- box spread
- A call spread and a put spread at the same two strikes, which pays the strike gap whatever happens and so works as a loan.
- conversion
- Owning the shares, buying a put and selling a call at one strike, which locks in the strike at expiry and works as lending.
- reversal
- The mirror of a conversion: short the shares, sell the put and buy the call, which works as borrowing.
Check yourself
Answer each question to see why the right answer is right.
1. You buy the XYZ $100 call for $3.45 and sell the $100 put for $3.41. What does the pair look like on the last day?
2. Why does the call cost four cents more than the put?
3. Real SPX December pairs fall on a straight line, but about 26 points below the stock minus the strike's value today, at every strike. Why?
4. At mid prices, the December SPX 7,000/8,000 box costs about 994 points, or $99,410, and pays $100,000 at expiry 46 days later. What is it, and what rate does it give?
5. If you buy all four legs of the near box at the ask and sell at the bid, what happens to the rate?
Finished the video and the quiz? .