The total cost of carry of the underlying is actually the cost of carry minus the dividends. At the moment the S&P500 pays about 2% in dividends, while the T-bill rate is about the same. As a result, the true cost of carry is currently close to zero. And in fact, the futures are currently trading at very close to zero premium over the cash.
yeah i used to have to calculate fv every day on a desk. even the dec futures have very little premium now. had even less when everyone thought the fed was going to cut more (about a month ago. i guess that interest = divs means buy 'em adage worked this time
You guys are overcomplicating the answer. Yes, there are inherent skews to all markets. For instance, in natural gas there is a call skew, in crude oil there is usually a put skew. This is just a representation of where there is a bigger demand for price protection, which is what these options are. But in answer to your question, there is a lognormal distribution in option pricing. When pricing options on futures, the upside price for any future is theoretically infinity and the downside is 0. So this is why a put is worth less than a call equally if they are equally out of the money.
I can understand that making a difference for a $30 stock, where zero is much, much closer than infinity. For an underlying as expensive and low-volatility as an index, zero and infinity should look like about the same distance away.
It doesnt matter, it still is a fact that when pricing these options the lowest the underlying price can go to is 0 and the highest is unlimited. It is the same reason why a straddle has a positive delta. In other words, in this example, if the s and p is trading 1400, the 1400 call has a higher delta than the 1400 put. Higher volatilities and higher prices may have a more dramatic effect but it is the same principle.
Walter - keep in mind that the original question asked why- if the futures were at 1400 - the 1375 call was more expensive than the 1425 put. The lognormal distribution you cited would actually have the opposite effect - it should make the 1375 calls cheaper than the 1425 puts. I think you're being thrown by the fact that he's talking about in-the-money options, rather than OTM options.
I'm not going to beat a dead horse on this one. I was an options market maker on the floor for 10 yrs and trade options off of the floor now. That was the answer to the man's question. I guess we can agree to disagree if you think that I'm wrong.
This thread is a mess. It is not a matter of anyone thinking you are wrong, you are either not communicating your point correctly or you have no idea what you are talking about. To say that in "any futures contract" "a put is worth less than a call if they are equally out of the money" is a mistake or just plain stupid. Today's June ES settlement 1408.25, the June 1360 Puts are 48.25 points out of the money and the June 1455 Calls are 46.75 points out of the money, and anyone who has ever traded options before will automatically know the Put is trading at a high price even though it is actually a little farther away. They don't need to look up that fact that the Call is 13.7 and the Put is 18.9.
Walter - from what you've written, you're obviously a man who knows his way around options - I can easily believe you were a floor trader. So I KNOW you know that the lognormal distribution causes the equidistant lower strike to be priced cheaper than the equidistant higher strike, assuming they both trade at the same implied volatility. I'm absolutely certain you know that. Perhaps you didn't read the original question carefully. Initially I didn't either, and I started to give the same answer you gave. In fact, I DID give the same answer - I was just faster deleting it than you were LOL.
Walter can speak for himself - but what he meant is that the theoretical value of the OTM put is less than that of the equally out-of-the-money call. Theory, of course, assumes that both options are trading at the same implied volatility - which in the real world they aren't, as your example shows.