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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: Dinesh who wrote (107999)	4/26/2000 6:57:00 PM
From: Joe NYC	Read Replies (1) \| Respond to of 1570547

Dinesh, When the market assigns the same volatility to these 2 stocks, the prices of calls and puts will be equivalent. Suppose the prices were different. Suppose the stock is at 50, close to the expiration and rising, and suppose the fact that the rising nature of the stock is priced into options and 50 call is say $10, and 50 put is $5. You can enter into a risk free arbitrage by selling the overpriced call, borrowing $50, buying the stock and buying the cheap 50 put. Suppose it is 1 month to the expiration. Your interest expense at say 6% rate will be $.25. Your net gain will be $4.75. If this kind of inequality existed, the market makers would engage in this arbitrage until the prices of the calls and puts are in line. Joe