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Strategies & Market Trends : The coming US dollar crisis
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To: Tommaso who wrote (20463)5/21/2009 2:16:18 PM
From: RockyBalboa  Read Replies (1) of 71462
 
It is similar to the concept of contango and backwardation in Raw materials futures (and in stocks the same supply problems exist, leading to "backwardation" as we see it frequently in AGs):

For an arbitrageur calls and puts are just two parts of a forward contract; and normally they trade strictly in line with the cash market (the stock), everything else is quickly arbed off. Any market maker with a meaningful balance sheet can arb off those small differences. It is important that the stock price is meaningless. (what counts though, is dividends paid and refi interest rate for a position).

Here an odd situation exists that an arbitrage is not possible because the stock can not be shorted anymore. So the stock price and the expected price is completely out of line. With GM at 1.61, GM futures for July delivery trade at 70cents when the fair price was more like, 1.60 (no divvy and no interest).

From the options, one can derive the parity value: at what price I own (or sold) stock when I buy a call and short a put (or short a call and buy a put).

The GM thing has distorted option prices big time so one never knows what is cheap and what not. When VI mentioned the cheap 1.60 calls and expensive 1.60 puts he is correct from the view of the stock price.
But I took exactly the opposite trade shorting 1.60 calls and buying puts at that price because from other options pairs and futures I was able to buy the stock even cheaper.
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