Hello, I'm new to this forum, and new to options. I'm reading a book on options, but I am confused by something I am seeing in the market: Current selling price of stock: $20 Strike price of stock: $24 Option expiration date: Jan 19, 2018 Price of put option (the "ask"): $0.90 My understanding of a put is this: It gives you the right to sell the stock to the put issuer, at the strike price, on or before the expiration date. Therefore, these numbers seem strange. It looks like I can do this: Buy the puts from the put issuer: 100 shares x $0.90 each = $90. Buy the actual shares on the market: 100 shares x 20 = $2000. Immediately sell the actual shares to the put issuer: $24 x 100 = $2400. Profit: $2400 - $2090 = $310. This can't be. What am I missing? Maybe this is a mis-price and will self-adjust before market open on Monday?
Everything you say is correct. The price of your option isn't. That pricing might describe the call on a very volatile stock, but the put would have $4 of intrinsic value. So in reality, you'd have that, a little extrinsic value, the spread, commissions, and fees you'd lose on that trade.
Thanks for your responses. It seems like the option price should be something like $4.50. That dollar amount would account for the $4 in "free money" between the current price and the strike price. Then there would be the extra $0.50 in the price because you have the time factor which needs to be priced in. Something like that would be a rational pricing model.
That put should have a minimum of $4 of intrinsic value plus some time premium. Either you're mistakenly looking at the call (or other incorrect symbol) or the broker is providing bad data. There's no free money like that in the market :->)
So a quick back of the napkin check of options prices is to calculate what is called an implied forward price. Let me emphasize this is not precise. The equation is Strike + Call Price - Put price = an approximation of forward stock price. Now in a world with 0% interest and a nondividend paying stock this is easy. It sounds like you were saying $20 strike - $4.50 call premium and a $.90 put premium the implied forward would be $23.60. If the stock is trading well above that - this implies this is actually a dividend paying stock and the implied forward shows the market is expecting about a $.40 cent dividend. If there is no dividend then the quotes or wrong or possibly stale. If those are actual tradeable option prices there is a massive riskless arbitrage that the dealer community should have arbed away. Some issues to consider as this is a really not very precise. Is the stock available to freely buy/short and what is the spread width.? Are the options available to free buy/short? Is there the possibility of a not yet declared special dividend?
Where do you see this price? I'm guessing on the internet... yahoo or something... they often have wrong/outdated prices. Or it's the last traded price, which is not the same as what it should be theoretically... since it could have been traded 2 days ago and the current stock price has moved significantly...
It turns out it was junk data. It was an IPO company, and I was told that for the first 5 days or so after an IPO, there usually is not any options trading. So it was just junk data that was in there for whatever reason. The implied volatility was 0%, which goes along with it being junk data. Thank you for everyone's responses. I'm not sure they put junk data in there. I think it would be clearer if they had something like an "options trading not yet active" message.