🎓 Capital Market Chronicles – Episode 199: OPTIONS – PUT-CALL PARITY
Ever wondered if calls and puts ever stop bickering and actually agree on something? 😏 Well, welcome to Put-Call Parity — the golden peace treaty of the options world! ⚖️
This simple but powerful principle explains how call and put option prices are linked. It’s the universe’s way of saying:
“Hey traders, no free lunch here — everything must add up!” 🍱
🧠 The Big Idea: One Law to Rule Them All!
At the heart of it all lies the Law of One Price, which says that two investments with the same payoff must cost the same.
In options lingo — if a call and a put can be structured to give the same outcome, their prices must be linked.
When the call price rises, the put usually chills out and drops — like a see-saw 🎢 keeping the balance.
And when the balance goes off, clever traders spot something magical: arbitrage — the finance world’s version of “free money” 💰😎
👩💼 Example Time: The Tale of Two Traders
Let’s meet our two investors, both with ₹5,00,000 burning a hole in their pockets 🔥
Investor 1 – The Call Crusader ⚔️
Buys an Infosys Call (CE 1000) and keeps some cash parked safely in a risk-free asset.
If Infosys zooms 🚀 above ₹1000, they cash in big.
If it doesn’t, they just lose the small premium — no big deal.
Investor 2 – The Cautious Collector 🛡️
Buys Infosys shares directly at ₹1000 each and adds a Put (PE 1000) as insurance.
If prices fall, they can sell at ₹1000 — no sleepless nights 😴.
Both have different routes, but at the end of the road, their outcomes match perfectly! 🎯
And that, friends, is Put-Call Parity in action.
🧩 The Magic Formula
The relationship that ties it all together is:
Call + Cash = Put + Stock
In mathematical terms:
CE + PV = S + PE
Where:
-
CE = Call Option Price 📈
-
PE = Put Option Price 📉
-
S = Current Stock Price 💹
-
PV = Present Value of cash invested risk-free 🏦
It’s the finance version of a balance scale ⚖️ — if one side goes up, the other must adjust to keep the system fair.
🧮 A Practical Example (Math Made Fun-ish 😅)
Let’s decode with numbers:
-
Strike Price = ₹400
-
Call Option = ₹36
-
Spot Price = ₹380
-
Interest Rate = 8% p.a.
-
Tenure = 3 months
First, we find the Present Value (PV) of ₹400:
👉 PV = ₹400 / (1 + 0.02) ≈ ₹392.98
Now, plug into the formula:
👉 PE = CE + PV - S
👉 PE = 36 + 392.98 - 380 = ₹48.98
So, the theoretical price of the Put should be around ₹49.
If the market price differs — ding ding! 🚨 there’s an arbitrage chance waiting to be grabbed! 💰🎯
🧠 Why Traders Love This Concept
Put-call parity isn’t just fancy math — it’s a trader’s compass. 🧭
When actual market prices stray from parity, you can create synthetic options — combos of stock, calls, puts, and risk-free cash — to lock in profits with little to no risk. 😎
For example:
-
If the put is underpriced → buy it.
-
If the put is overpriced → sell it.
Simple, elegant, and (occasionally) profitable.
⚠️ A Few Real-World Speed Bumps
Like all good theories, put-call parity assumes a perfect world — no brokerage, no taxes, no sneaky dividend drops, and zero panic traders 🤷♀️
But in reality:
-
Dividends mess with prices 🪙
-
Transaction costs nibble at profits 💸
-
Interest rate changes shake things up 📊
So while it’s a brilliant compass, it’s not a crystal ball 🔮
🧾 Summary: The Great Balancing Act
Put-Call Parity keeps the options world in check — making sure prices stay fair and traders stay alert.
It helps:
✅ Spot arbitrage opportunities
✅ Understand fair value
✅ Build smarter, risk-balanced strategies
In short — it’s the invisible hand keeping the call and put siblings from fighting! 😆👫
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