The Dominos Are Falling

[dwy000]

I certainly wouldn't deny that those factors are going on in the market for Tesla options but every option pricing class i ever took (and there were a bunch) was based on the theory that puts and calls should be priced similarly with the only exception being as the stock price approaches zero (since call upside is infinite $ and put upside is capped at a zero stock price).

If they aren't trading that way there is (theoretically at least) an arbitrage to be made. 

[RichardGibbons]

2 hours ago, dwy000 said:

I certainly wouldn't deny that those factors are going on in the market for Tesla options but every option pricing class i ever took (and there were a bunch) was based on the theory that puts and calls should be priced similarly with the only exception being as the stock price approaches zero (since call upside is infinite $ and put upside is capped at a zero stock price).

If they aren't trading that way there is (theoretically at least) an arbitrage to be made. 

I've never taken an options pricing class. Nevertheless, I think you're either misremembering or perhaps misunderstanding what put/call parity actually means. It doesn't mean that puts and calls trade for the same price. It just means that a long call has to be priced to deliver an expected return equivalent to long shares and long put.

Here's a quote from McMillan's Options as a Strategic Investment 3rd Ed. in the chapter about puts (McMillan's italics, not mine):

Both the put and the call have their maximum time value premium when the stock is exactly at the striking price. However, the call will generally sell for more than the put when the stock is at the strike. However, the call will generally sell for more than the put when the stock is at the strike. Notice in Table 15-1 that, with XYZ at 50, the call is worth 5 points while the put is worth only 4 points. This is true, in general, except in the case of a stock that pays a large dividend. This phenomenon has to do with the cost of carrying stock. More will be said about that effect later. Table 15-1 also describes an effect of put options that normally holds true--an in-the-money put (stock is below strike) loses time value premium more quickly than an in the money call does. Notice that with XYZ at 43 in Table 15-1, the put is 7 points in-the-money and has lost all its time value premium. But when the call is 7 points in-the-money--XYZ at 57--the call still has 2 points of time value premium. Again, this is a phenomenon that could be affected by the dividend payout of the underlying stock, but is true in general.

 

Edited April 2, 2021 by RichardGibbons

[lnofeisone]

10 hours ago, RichardGibbons said:

 It just means that a long call has to be priced to deliver an expected return equivalent to long shares and long put.

 

This (as C+PV(Strike Price) = P + Spot Price. In either case, put/call parity is a theoretical exercise that is mostly applicable to European style options and wouldn't readily apply to Tesla. The exception being that you would hold options to expiration and in that case you have to navigate points 2 and 3 that Richard outlined.

[dwy000]

10 hours ago, lnofeisone said:

This (as C+PV(Strike Price) = P + Spot Price. In either case, put/call parity is a theoretical exercise that is mostly applicable to European style options and wouldn't readily apply to Tesla. The exception being that you would hold options to expiration and in that case you have to navigate points 2 and 3 that Richard outlined.

The higher price for the call generally reflects the present valuing of the strike price at maturity in put/call parity (since buying call and selling put gets the same value as owning the shares without having to fund the upfront cost of buying shares).  In a virtually zero interest rate environment and a fairly short time period the difference would be meaningless - especially for a high volatility stock. 

But Inofeisone is correct that this is all theoretical.

[IceCreamMan]

5 hours ago, dwy000 said:

The higher price for the call generally reflects the present valuing of the strike price at maturity in put/call parity (since buying call and selling put gets the same value as owning the shares without having to fund the upfront cost of buying shares).  In a virtually zero interest rate environment and a fairly short time period the difference would be meaningless - especially for a high volatility stock. 

But Inofeisone is correct that this is all theoretical.

It sounded like RichardG was comparing puts and calls that were each X% OTM, i.e. different strike prices from one another. A call option on an equity that's 10% OTM will usually have lower implied volatility than a put option on the same equity that's 10% OTM. Put/call parity works for options of the same strike, but not different strikes.

[RichardGibbons]

Yeah, volatility skew does cause higher prices for OOTM options, and in particular puts, but my main points are:

1. If a stock is trading at the strike price, calls are more expensive than puts (because of put/call parity)
2. Even if there is no volatility skew, out of the money puts tend to have higher premium
3. As puts more more and more into the money, they lose premium faster than calls do when they move into the money
4. If you are doing simple, long option trades, these things affect your profitability

Also, if you'd don't actually believe McMillan, you can pretty easily verify this yourself by playing around with an options calculator, or just looking at option prices.

(And the proviso is that it all goes out the window if shares become really hard to borrow. e.g. with Fairfax back in the early 2000s, it was a profitable trade to convert your long shares into a synthetic long (long shares, short put).)