Hi guys, Theoretically, if your put and call IV is the same, there should be no difference in putting on a Bear Put spread and a bear call spread at the same strike. So in the attached example, why is the $1 bear call spread paying me 37 cents, whereas the $1 bear put spread costs 74 cents(assuming mid price execution)? The IVs are almost identical(I assume the IVs are based off mid), so I don't think that is the issue. What am I missing here? Thanks for the help.
A vertical call spread and vertical put spread, that create a box spread when both bought or sold, should alway = the strike value, which here is 1.00. There are circumstances where it is worth more and less. There is no reason to believe that they will trade at the same price. Take an ITM call spread and an OTM put spread on the same strikes that are 5 points wide. The call spread might trade at 4 while the put spread might be 1. The put call parity comes from doing both. Unless I misunderstood your question, I hope this helps.
Herkfsu, your original understanding is essentially correct. In a perfectly liquid market (bid=ask for everything), the vertical put spread and the corresponding vertical call spread should have the same greeks, so should always move in value by the same amount at all times, including through expiration. The money raised from putting on the call spread should equal the difference in strikes minus the cost of putting on the put spread. In this case, $0.37 is sort of close to $1 - $0.74 (even though that's $0.26). The reason of the discrepancy is the wide bid-ask spreads. It is unlikely that your orders would actually fill at the midpoint. If you sell the call spread for $0.37, you still need to put up $1 of margin, so you are still using $0.63. When the spreads expire, the value of the call spread plus the value of the put spread will equal the difference in strikes. In your example, the puts and calls have similar prices, so these options must be close to the money. So, the underlying was probably a little under $29. I don't know if this is the security that you were looking at, but one that had a similar close price and had options with similar implied volatility is UVXY, and the options with similar premium right now expire on October 20, 2017. Options for UVXY close at 4:15pm, and I don't know what UVXY was trading at at at time, but, at 4pm, it closed at $29.14. So, if we assume that in your example, let's apply a naive put-call parity by assuming that carrying costs are zero, and attempt to narrow the bid ask spreads accordingly. If I do that, I get the following bid ask spreads, stated in terms of premium (price - intrinsic) rather than price. Strike=30: Call(intrinsic=$0): $5.05..$5.60, Put(intrinsic=$0.84): $5.51..$6.06, intersection: $5.51..$5.60, width of intersection: $0.09, midpoint of intersection: $5.555. Strike=29: Call(instrinsic=$0.14): $5.56..$5.76, Put(intrinsic=$0): $5.60..$6.15, intersection: $5.60..$5.76, width of intersection: $0.16, midpoint of intersection: $5.68. Adding the intrinsics to the midpoints of the intersections of the premiums, I get the following probably fill prices for the options, if the underlying really was at $29.14 when these option prices were offered. Strike=30: Call = $5.555, Put = $6.395 Stirke=31: Call = $5.82, Put = $5.68 All four of these prices are within their corresponding bid-ask spreads. At these prices, putting on the call spread would raise $0.265, tying up $0.735 of margin ($1 - $0.265), and putting on the put spread would cost $0.715 and tie up no additional margin. The $0.02 difference is well within the widths of the intersections of the premiums, shown above.
Thanks for the responses guys! My confusion really comes from the fact that the mid prices have the same IV. If the IV lines up, the prices should.
Uhm... The IV's don't line up... since 138.7 is not 138... Also midpoints and the volatility models that most platforms use are a bit unreliable. But, and that would be my guess in this case... there might be a dividend involved? EDIT. Right... it's UVXY... Nothing weird in my sheets.
My midpoints, or IB's, line up... 5.60-5.33=.27 and 6.29-5.57=.72 is a box of .99... perfectly normal. You use IB as well correct? In stead of Mid, use Model... that's the price according to IB's Volatility model. I think you are comparing apples (mid) with oranges (model IV).