When evaluating ATM options on indicies, the ATM put is typically much cheaper than the ATM call. Assuming a trader is bullish on the index.... it seems that going long a futures contract(s) with a simultaneous purchase of ATM put(s) is more desirable than a simple ATM call purchase. Am I missing something?? Input appreciated.
I bet your total cost would be lower (in the worse case it would be the same) if you go with calls only. Don't forget that going long on futures contract has additional cost of annual interest rate. By the way how far out options in terms of their maturity do you use?
How can that be?? Today, SPX is trading at 1284. say March expiration, the March 1285 Calls are trading at 25.20 - 27.20 The March 1285 Puts are trading at 20.80 - 22.80 Clearly, going long a futures contract (no cost other than margin req) and buying a put provides breakeven at 1306 Purchasing just a call places breakeven at 1310.
The futures are not trading at 1284. You are comparing options on the cash index to futures and option on futures which is apple and oranges.
I believe Optioncoach is correct. The SPX underlying is the cash index. Therefore the SPX can not be directly, synthetically replicated with futures contracts. The futures price (like the forward price of the underlying) takes into consideration the cost to carry (among other things). Here's my understanding on option pricing related to the difference in ATM Put/Call pricing. I'm sure one of the experts here will be more detailed (or accurate). One reason the ATM calls are priced more than the puts is because the call pricing takes into consideration the cost to carry the underlying stock (like futures pricing). Also, deltas for ATM calls will be higher than ATM puts due to the lognormal distribution used to determine them. This will also lead to higher pricing both theoretical and actual.
Phil, Michael: thanks for the replies...let me get this right: are you saying Phil, that when you enter a futures contract (long), the entry value is higher ("cost of carry") than current cash index (upon which the CBOE "spx" is based)? Therefore, if the moment I purchase a long SPX call (let's say 1200 is exactly ATM) and the final settlement (SET) is 1300. Then my 100 pt. gain minus the cost of the option would be equal to (in pts.) A futures contract (SPY) final settlement price (SOQ, assuming would also be 1300) minus the entry value???? So, theoretically, the difference in entry price of SPY futures contract and current SPX index would be the same as the cost of a Call option on the SPX??? Thanks...
You completely lost me. SPY is an ETF not a future. The S&P futures are SP and the E-mini Future is ES, Options on eiter of these would be options on SP or options on ES. SPX is a separate instrument (cash index) with separate options. A long underlying and long put = long call (allof the same asset class). So you cannot compare a long SP + SP Put to a long SPX Call, they are not synthetics buecause they are different products all together. In fact 1 point on SP = $250 and 1 point on SPX = $100 so even the dollar value do not match up.
If I understand the original question as; why do long puts and long calls have a price differential when the underlying equity is ATM? First, this is a good observation and has been debated for a long time. Second, the best answer I have found has to do with intrest rates and the underlying value of time on money. It goes something like this, when you buy the call you are deferring the purchase of the underlying stock and some of the inherit risk in owning the stock outright (mainly control the shares without the higher cash outlay). Higher interest rates widen the difference between put and call prices, only at a 0% real interest rate would an exact price correlation be 1 to 1 in regards to the puts and the calls. The cost of carry is really the main culprit for the price differential betweent he long calls and the long puts on the underlying equity when it's ATM.
I'm lost too! Let's first settle on the underlying, which one is it: - S&P 500 cash index (SPX), - S&P 500 futures (SP), - S&P 500 e-mini futures (ES),or - S&P 500 exchange-traded fund (SPY)!? Each and every one of them has options, which are NOT fungible. Edit: By the way, we also got XSP now, which is mini-S&P 500 cash index and it also has options.