Lawrence D. Cavanagh

Are Puts Cheaper Than Calls?

by Lawrence D. Cavanagh   06/17/09

Free Trading Guides

Uses of Put-Call Parity

Can individual traders take advantage of the put-call parity rules?

Because the market maker has a clear advantage in trading options, it is unlikely that the typical investor will see actual "risk-free" arbitrage opportunities from put-call parity.

However, these rules are useful, because knowing them can help you quickly determine what your strategy alternatives are.

Here are some applications:

Rule 3: Often, you may be interested in buying a particular stock, but you are concerned about the risk and may want to hedge it with a put. Knowing rule No. 3 tells you that buying the call will give you the same risk/reward as buying the stock and the put.

Rule 6: Often, you may see attractive covered call opportunities, where the call is in-the-money. Here you may be reluctant to establish the position in fear of having the call exercised. Here you can write a cash covered put instead of the covered call.

In an earlier example, we showed a comparison between an in-the-money covered call (the November $22.50 call) and the corresponding out of-the-money put write (also November $22.50 strike) on a stock trading at $23.21. Although the cash covered put offered a somewhat lower per annum yield than the covered call (51.0% versus 57%), it also offered investors the advantage of no closing transactions if the stock ends up above the $22.50 strike price.

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Lawrence D. Cavanagh is a contributor to TheOptionsInsider.com, and the Editor and Senior Analyst of The Value Line Daily Options Survey. To learn more about him, read his bio here.