OK, Optionetics is banning me now after every other post. It's kind of hard to have a dialogue over there when they ban you after you disagree with one of their staff writers. So let me post this here and if someone over there wants to copy and paste this they can. One of the problems we are having here is a communication issue. They are using the wrong language to convey what they are trying to say. This particular phrase keeps popping up, "put/call parity breaks down". Let me define what put/call parity is here. Put/call parity states that calls and puts at the SAME strike have to trade at the same vol otherwise an arb can be had. The only time this will not be the case is with either a pending dividend or if a stock is hard to borrow. Now, some of the jokers over there are trying to make the argument that put/call parity should hold from the time a spread is put on till expiration. Of course put/call parity only refers to a trade at it's inception and at expiration. Many things can happen between inception and expiration in the interim that can throw this relationship out of balance. That is NOT a violation of put/call parity. Again, put/call parity is only used at the inception of a trade where one has the opportunity to trade it's synthetic counterpart for a risk free arb. If one then holds the trade all the way through to expiration, the relationship will hold. Now, somehow this got mixed up in the conversation about collars and bull call spreads where many over there were convinced that put/call parity is violated through the collar under some circumstances. Of course this is hogwash, as if that were the case, I could buy the collar and sell the corresponding call spread for a risk free profit. Then the response was, well after a huge drop in the stock price, put/call parity is being violated at that given time. Again, this is false. because if one were to go into the marketplace at that time and initiate a spread, put/call parity would be sound. Yes, the original spread would deviate because the interest rate component has changed. One is able to relieve themselves of paying the carry and can offset their trade. This is NOT a violation of put/call parity because this was not known when the trade was entered nor could have one arbed this from the onset. This of course is becoming increasingly frustrating going back and forth when these so called option experts keep saying that the collar is somehow cheating the put/call parity rule with it's synthetic counterpart. Then of course there is this rolling down of the calls being termed dynamic hedging which is almost equally as comical. Dynamic hedging refers to one being able to mantain delta neutrality through the life of the position. Selling call spreads as a stock is dropping has nothing to do with dynamic hedging. Anyway, I use to criticize ET alot about the censorship here and I was way off. ET is heaven compared to that Optionetics site. If you call someone a village idiot over there you are banned for life. LOL. Or if you just disagree with one of the staff writers. My God, it's like the old USSR over there. Anyway, if anyone from that thread over there wishes to discuss this here, they can feel free. Have at it.
BTW, you can read more about put/call parity here at Wikipedia. http://en.wikipedia.org/wiki/Put-call_parity
Thanks for the link Mav. I see the following on wikipedia: "Put-call parity only holds for American options, if they are not exercised early." This seems to imply that p/c parity doesn't hold if there is early exercise. Which seems to give collars a little edge compared to the vertical. You wrote: "Of course put/call parity only refers to a trade at it's inception and at expiration. Many things can happen between ..." So, p/c parity doesn't hold during the course of the position. You can call it breakdown, irrelevance or whatever you like - it's now simply a matter of semantics. Seems you are in agreement, in principle, with the 'buffoons' at optionetics, lol. daddy's boy
Looks like everyone is enjoying their New Year's eve, except for you and me, Mav. We're the only ones left posting, lol. See you next year. All the best daddy's boy
I thought it pretty funny how one of the writers was so deferential when he thought Mav was "Dr J" (the options guy). I grew up a 76er fan, so I certainly had great respect for the REAL "Dr. J", but I was never impressed with the options guru with the same name.
No, we are still not in agreement. The fact that marks can vary from inception to expiration has nothing to do with put/call parity breaking down. I will say this again, put/call parity is a relationship at inception. It has to do with the ability to attain a risk free arb at the onset. What these guys are describing is a scenario where put/call parity does not even come into play. They are trying to defend their bonehead reason for putting on the collar over the bull call spread in the offchance that GOOG drops 400 pts!!! They are also are using the collars on Jan 08 leaps where they bring a whole new set of complications in regarding interest rates. Listen to me very carefully, what they are saying is 100% false. What is in their mind has some validity but they are not explaining and defending the concept correctly. Nobody puts on a 12 month collar trying to capture the cost of carry on a large move in a stock. The reason being is they are taking way too much risk on a long shot bet that has less then a 1% chance of happening.
Geez man, it was meant to be tongue-in-cheek! They respect noone unless they come from an optionetics background or are endorsed by optionetics. daddy's boy
Look here Mav, you say: "What is in their mind has some validity but they are not explaining and defending the concept correctly" Give me a break, please. You've gone from claiming that their stuff is total bullshit and you were going to talk to their CEO to get them fixed, to now saying that they have 'some validity' and that the problem lies with their way of explaining things (as I said previously, semantics). You've also agreed that p/c parity only holds true at inception and expiration, and not during the course of the trade (same as the optionetics crowd said). So, back to square one. Knowing all of the above, which we agree on, do you now agree that the collar is a better way of trading a long term bullish view on an underlying than using verticals? daddy's boy P.S. I've also been wondering what happened to riskarb.