DMO - I'm shocked? Hardly. This is all getting a bit convoluted. First, my bad for using a 1.5% interest rate in a hypothetical example. The point of that was to present an example with a difference in cost. Obviously, if the interest rate is zero, there's no carry cost and ATM puts and calls will have identical values and question resolved 3 pages ago. The purpose of the hypothetical was to resolve my question as to whether a syntthetic straddle with puts and stock was a better choice than puts and calls or stock and calls. In re MY interest rate, that is the problem but AFAIK, I don't see your answer as the solution. Modeling with my interest rate of near zero will put me in a parallel universe vis a vis the market I think Donnap resolved it with the answer that "We both know that the avg. retail doesn't earn int on short proceeds and for now we pay - but the option pricing assumes that we are all MMs." IOW, if the options have an imbedded carry cost due to some interest rate (pick your own number) but my broker screws me by not paying me less than fair interest on the cash balance then I don't make up any difference due to carry cost in the options that I'm buying. And therefore my conclusion is that the puts/stock position is the best chioice when considering only carry cost, in isolation (ignoring margin, availability, etc.).
NO NO NO! The options pricing model doesn't assume you are an MM -- unless you trick it into thinking you're an MM by feeding it the MM's interest rate rather than yours. If you had fed it YOUR interest rate, then it would have given you YOUR fair value for the options. Donnap's solution is not different from what I'm saying. You told Donnap your real interest rate (zero), and he told you to ignore the effect of the 1.5% interest rate. If you had given the pricing model the same info you gave Donnap, it would have told you the same thing! In other words, rather than feed the model false info then figure out how to ignore what it tells you, why not just give it the correct info in the first place? You're afraid that puts you in a parallel universe with the rest of the market? I disagree. Your circumstances may well be different from someone else's. Don't worry about what's fair value for them, worry about fair value for you. If you come up with a fair value different from someone else, that's fine! That's what makes a market. There's no embedded interest rate, not for you. The fact that someone else may get paid interest is of zero relevance to you. Just be honest with your model. Open up your heart to it and tell it how your broker screws you by not giving you any interest. It will understand and adjust its prices for you.
I believe thatâs Donna P as in the womanâs name Donna not a guy. What a moot point this all is since none of us are making markets in a vacuum. There was a time years ago you could pick off the market in thinly traded options because some prices were solely put out there by one firm and they could have screwed up their pricing. Those days are long gone and while the exercise on pricing and carry is sort of interesting it has little to no value in the actual world of trading today. Of course those were the same days when I could run my âsheetsâ on a 1200 dollar index 10 bucks wide and interpolate the correct markets and deltaâs without worry of getting picked off.