Yes. Absolutely. I'd even go so far as to say, "Typical" of every major divot on the S&P over the last decade. "...Stop playing...?" That depends on what you do now, right? This all signals danger. Danger means risk. Along with risk *should*come* reward. Yep! But as an option *seller*, I'm going to be VERY cautious -- I'm going to push out wings and shorten legs and be *really* picky about when I write. If I move (and I need to expect to!), I'm going to L.A.M.B. -- leave a man behind -- If I have 5 spreads on, I'll roll 4.5 of 'em, leaving a long behind. If vol is high enough, I'll look at calendars and diagonals. And finally, I'll take earlier/larger losses if it will reduce my (worst) exposures -- taking partial profits frees 100% of margin consumed, hey. Not so much "stop playing" as playing with altogether different tactics.
Generally early exercise on dividend paying stocks means that ITM calls trade at a minimum of parity with respect to the Spot Price ... As a former MM you may have a 'formula' for put-call parity on American style options ... if so ... what does p-c-p look like for say Stock price $100 Dividend $10 payable in 30 days Expiry in 60 days Strikes 60 / 80 / 100
I would calculate to cost of carrying on the conversion and the reversal for me. I would alter my trading software by lowering interest to 0 and add weekly dividends to simulate neg interest until the P and C IVOL meet to see what the market is using. I would then look to see if there is a place I make money vs the market.
Robert I think you have just described why put-call parity doesn't necessarily hold for early-exercise type options with dividends ... manually iterating vols until they match the market maybe the practical solution ... but it ain't a formula for put-call parity Put-Call parity is usually defined by a formula that will reconcile put/call prices with respect to Spot / Strike / Carry ... something like Call = Spot + Put - presentValue Stike Cheers James
Yes and no. The trading platform will use a default interest rate and dividend flow. It will not adjust for very hard to borrow or your rate. Here is an example. BYND is very hard to borrow. The Sept ATM calls are 38.11 and the pouts are 82.95. There is still put-call parity but the default rate of 1.68% (10 year T-bill). That is not accurate for this symbol. I'd have to put in my cost to short it. Then add extra because you can't get a locate.
Robert I would be interested to see your calculation of put-call parity at 150 / 160 / 170 strikes ... However, BYND not a good example of the issue we are discussing ... as BYND has no dividend Why not pick a more generic option that pays dividends before expiry date ... how about SPX ? Cheers James
SPX is not a good example as it hedged with the future. This is SPY. Puts and Calls are almost equity Ivol at 1.68% for Sep expiration.
We seem to be dancing around the issue a little ... what has Ivol got to do with put-call parity ... except by showing there is a difference between call-put Vols ... you seem to be saying by definition that put-call parity does not hold for SPY One final request for you to show the formula that reconciles put-call parity at say the 260 / 293 strikes