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OK some clarification.
Put Call Parity in options will always hold unless stock cannot be shorted.
So a covered call write and an uncovered put are exactly the same. The
"extra" return in the call over the put is offset by the cost of carry in
the stock carried to cover the short call.
A conversion or a reversal is a riskless trade except under one
circumstance.
A conversion very quickly is Stock + Put - Call and the unleveraged rate of
return here should "normally" be the T-bill rate unless markets are out of
line. However this is a risk in the reversal conversion relating to two
possible occurrence. For the reversal there is the buy in risk on the short
and for both the reversal and conversion you are "financing" the risk of
early exercise if you are using an instrument that trades American style
options. Market makers can leverage this trade by a factor of 20 to 1.
There is no power on earth that can violate P/C parity as long as things can
be traded. If call got out of line with puts you would simply sell
overpriced calls and buy the stock and the put to replicate the call. That
is why these things are rarely out of line for long WHERE EVERYTHING CAN BE
FREELY TRADED. It works in equity market .... it works in futures markets.
Alex Jacobson
Vice President Business Development
I S E
212 897 8125
212 425 4926 (FAX)
877 7209918 (SKYPAGE)
ajacobson@xxxxxxxxxxxxxx
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