I found a stock that is taunting me with its' rich premium. It closed today at 7.57. The Jul 7.50 call is bid at .95 while the same strike put is bid at .75. I understand how the risk profiles should be the same, but it would seem that that is not the case in this situation. At the surface, a buy write is a better deal for me than a cash secured put would be. What am I not seeing? Thanks guys.
I'll take a shot - the call is .07 itm throw in the carry cost and you make up the difference but if I'm wrong do a conversion and make it a sure thing.
The carry on 7.50 is a dime to expiration. You're stating "bid to bid" so the twenty cents won't last. I doubt there is more than a nickel at best in the conversion [above carry].
Max, you need to look @ the bid and the ask, not the last price. And a buy/write should ALWAYS yield you a slightly higher yield then a naked put, simply because you're putting up money to buy the stock, and 5% interest (annualized) is priced into the buy/write.
It doesn't "yield" more... the return is the same traded at fairval. The premium on the call over put is equivalent to the carry on long stock. You know this -- I am simply taking issue with the concept of greater yield.
Those of you unfamiliar with carry -- it's simply pricing a forward contract based upon "borrowing" at the risk-free rate.
The spread is a nickel in each case. Perhaps I didn't present this in the best way. As I hope to sell these as short options, I thought the bid price was the factor to consider. After reading your replies, this isn't so unusual after all. Thanks again for your clarification.
Sure, and I missed the fact that the shares were $.07 above the strike. C/P premium of $.20, less $.10 carry, less $.07 intrinsic call value, less the $.05 to lift the put offer -- leaves the conversion underwater by a couple pennies. Obviously not your concern, but it explains the call premium.