The Basics of Put Call Forward Parity
The Basics of Put Call Forward Parity
Options trading is an important part of derivatives markets. It is a contract between two parties giving the buyer the right but not the obligation to buy or sell a particular asset or commodity at an agreed upon price and time. Put Call forward parity is a significant concept in options trading which helps to determine the relationship between the values of call and put options of the same underlying security, maturity, exercise price and American or European style.
What Is Put Call Forward Parity?
Put Call forward parity is a relationship between the prices of put and call options which relies on the difference between the prices of the underlying asset and the strike price of the security. It states that for a European style of option, the theoretical value of a call option should equal the theoretical value of the put option plus the current spot value minus the exercise price.
How Does It Work?
Put call parity relies on several factors. These include the price of the underlying asset, the exercise price of the option, the time to maturity and the cost of carry. The cost of carry is the cost of maintaining a position and includes brokerage fees, taxes and other costs.
The theoretical value of the option is the sum of the spot value and the cost of carry. Therefore, for a call option the theoretical value of the option is equal to the spot value plus the current cost of carry, minus the exercise price. For a put option, it is the spot price minus the current cost of carry plus the exercise price.
Implications Of Put Call Parity
Put call parity is an important risk management tool that can be used in options trading. It allows traders to assess market risk and use it to their advantage. It also helps traders to analyze and mitigate volatility. Furthermore, it provides an ideal basis for arbitrage trading which helps to improve market efficiency.
The concept of put call parity is also used in hedging and margin trading where traders who have opened a long position in the underlying asset can buy a call option as a way to hedge against any potential loss. Additionally, it plays an important role in leverage trading, as investors can use options to leverage their positions without taking on significant amounts of risk.
Strike Price & Put Call Parity
Strike price refers to the price at which the option buyer can exercise the option and benefit from it. Put call parity can be used to calculate the price of options, which is based on the differences between the spot price of the underlying asset and the strike price.
The strike price is an important factor in determining the value of an option. A higher strike price leads to higher prices for both call and put options because the buyer has to pay more to purchase the asset if it goes in their favor.
MarketXLS: Analyzing Options and Put Call Parity
MarketXLS is designed to empower traders and investors by transforming the vast amounts of financial data available into actionable insights which can be used to make informed decisions in the markets.
It provides advanced features to analyze options and the put call parity for any asset. With MarketXLS a trader can track how options and put call parity has been performing, monitor the changing prices, and use that information to track trends and make informed trading decisions. This data can be used to analyze and optimize hedging strategies, assess market risks and create more effective trading strategies.
MarketXLS also features a comprehensive range of tools which can be used to analyze, track and visualize options data, making it easier to analyze options and put call parity. With MarketXLS, traders can get real time options data, trade on the same platform and capitalize on opportunities in the markets.
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