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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Joseph G. who wrote (9225)	11/5/1997 10:31:00 PM
From: Bilow	Read Replies (2) \| Respond to of 94695

Hi Joe; See you got there before me... A simple example of the equality of call and put premiums on SPX options. Current value of the SPX being 942.76, one would naively expect that the puts and calls struck at 940 would be about equal in value. Not so: Sep98 Call 940: 104.00 Sep98 Put 940: 68.60 cme.com cme.com But in order to arbitrage this, you would have to hedge using the Sep SPX future, which closed today at 971.80. Lets work it out. (0) Start with 1040.40 in your account. (1) buy the Sep98 940 put for 68.60 (2) buy the Sep SPX future for 971.80 (3) sell the Sep98 940 call for 104.00 You now have 104.00 in your account, plus the above securities. As with my INTC example, you are completely hedged. No matter what happens to the SPX, you will end up with exactly 940.00 + 104.00 = 1044.00 in your account. (Before commisions and spreads.) Your profit will be essentially zero. Carl (and the Ferengi) says "don't do that." If they get way out of whack, even you and I can arbitrage them. In other words, the risk-free arbitrage is too attractive to allow a big difference between put and call premiums. I think there are some special situations that would contradict this statement, but it would require something really strange going on, and probably only apply to a single security. Nothing strange is going on with the index options. -- Carl