Newbie: what is this called?

Discussion in 'Options' started by mynameismatt, Oct 4, 2011.

  1. So, I'm new to options but not to stocks, and I was just looking at the relationship between puts and calls. In the average market, all other things being equal, I would expect a $5 OTM call to be priced slightly higher than a $5 OTM put (as the market has had the tendency to move upwards over time), especially with further out expiration dates.

    Now, I'm looking at options for SPY, which had a close today of 112.34: the 116 call ($3.66 OTM) expiring OCT7 is priced at $0.34; the 109 put ($3.34 OTM) expiring OCT7 is priced at $0.84. I realize that the put is $0.32 less OTM than the call and given that the expiry is very near, the delta on the option is high... if there were a 108.68 OCT7 put ($3.66 OTM), then it would likely be priced at about $0.55 (still considerably higher than the equivalent call @ $0.34). What is this relationship called (between call and put prices, given same expiry dates and same intrinsic values/distance OTM)? It's not put-call parity, is it?

    Is it commonly said that, in the case above, because the put is valued considerably higher than the equivalent call that the options market deems the stock (in this case, the ETF SPY, a proxy for the stock market) more likely to fall than rise in value until expiry?
  2. UddaMan


    What you’re referring to is called option SKEW. There is the perception that stocks go down faster than they go up. So, OTM puts are SKEWED higher than OTM calls. This is very common in the equity markets. Also, when stocks do go up, it is common for option volatility to decline. When stock go down, it’s common for option volatility to increase. This also adds to the desire to pay more for a put than a call.
  3. In the absence of special factors (different implied volatilities, pending dividend, hard to borrow stock, skew) , an equi-distant call would be valued higher because of the carry cost (see conversions and reversals). So read a bit about conversions/reversals, implied volatility, skew and things may be clearer.
  4. Yes, thanks for the replies.

    Is the Natenberg book good for this type of stuff? I'd like to learn a lot about options pricing and matters such as this.
  5. Simply look at the "3 way" (conversion) for all option series. You'l find that there are no "over value" calls or puts, when you put them into a conversion. Buy stock, sell call, buy put.... all will work out to a few pennies of carry cost until expiration. It's almost automatic, since all arb houses look for this to get out of line by pennies, and then just do the conversion (or reverse conversion) to take positions off.

    So, just take your put and calls at the same strike, you'll see what I mean.


  6. ASE1245


    He was asking about the relationship between OTM Puts and OTM calls, not the same line. He's correct, if the stock is easy to borrow, and each option had the same vol, the call would be worth the same or be worth more than the put because of cost of carry. However, almost all equity options have a vol skew where the OTM put is higher than the OTM call.

    In some commodities, the skew is the other way because of the risk of shortages and delivery risk.(check out options on sugar)
  7. That's true but it doesn't have much to do with the OP's question.
  8. I'd read anything that you can get your hands (or mouse) on and learn as much as you can about what interests you.