In theory they can't be different ~ otherwise there is an arbitrage between lifting the cheap and offering the rich. The difference is explained by the implied discount rate which one can infer by inverting the stock option put-call parity approximation: C-P = S - K*(1-rt) - Dividends (C-P+D-S)/K + 1 = rt ((C-P+D-S)/K + 1)/t = r Once you've priced against that discount rate then the IVs should be equivalent. However market effects like a borrow squeeze can alter this. For shorter term options with smaller interest rates and small dividends this is a good approximation.
In my intuition: Yes, in theory, they should be the same, but option prices are a product of supply and demand. Minor differences are to be expected between the two. If the difference is bigger than the spread + TC, I would say that (if the option is American,) maybe a speculation on an increase in interest rates can increase the value of a Put more than a Call. Looking forward to hearing the answer!!
Interesting question, but I don't have the answer! But may I suggest a topic for a futrure video. As you know the US market is now having a lot of high yield etf. It would be very interesting to be able to evaluate the risk on some of those etf that use synthetic covered call strategy: writing calls on security that the etf do not owns!😁
Hey, do you know the best place to find monthly fundamental data for stocks, over the span of decades? For back testing. And one that takes into account survivorship vials for delisted stocks.
I forward your question to ChatGPT4, and here is the reply: "Yes, in a perfect world without arbitrage opportunities, the implied volatility for a call and a put with the same strike price and expiration should be the same. This property is a result of put-call parity, which is a fundamental principle in options pricing that defines a relationship between the price of European put and call options of the same class (i.e., with the same underlying asset, strike price and expiration date). However, in the real world, slight discrepancies can occur due to factors such as bid-ask spreads, transaction costs, and liquidity issues. These differences, while typically small, can result in slightly different implied volatilities when calculated from observed market prices of put and call options. That said, if you see a significant difference between implied volatilities of a put and a call with the same strike and expiration, it might indicate an arbitrage opportunity, a problem with the data, or a violation of some assumption of the Black-Scholes model or the conditions required for put-call parity to hold."
Hi everyone, can someone ask this important question ,please ?: If you buy a call/put option that only has intrinsic value, then you can almost forget about Theta an IV because the option price movement will not be affected by them? is that right? : Theta and IV only applies to the extrinic value part and not to the intrinsic value part of the price of the option? Else, if you buy a call/put option with both intrinsic and extrinsic value, but, the amount of intrinsic value is bigger than the extrinsic value , you can only lose money if your option ends OTM?I mean, even if end up losing all the extrinsic value, because your option ends ITM (you get right the direction of the stock movement) , still has intrinsic value (and bigger than the one it had when you bought it) You can only lose (because of theta and IV) the extrinsic value part , not more than that? Thanks in advance
What i'm really confused about is when you're making this API call is understanding whether this is a 4 dimensional array? Said differently, for each t_i are you returning, for that day, ALL the strikes for MSFT between 13:00 and 14:00? (thus 4 dimensional as you'd have the 'smile' for each option on that day at that time ) OR are you returning only the strike prices of ATM options on MSFT between 13:00 and 14:00? Sorry, may be a silly question
Thanks for watching all, looking forward to hearing your responses to my last question of this tutorial!
In theory they can't be different ~ otherwise there is an arbitrage between lifting the cheap and offering the rich. The difference is explained by the implied discount rate which one can infer by inverting the stock option put-call parity approximation:
C-P = S - K*(1-rt) - Dividends
(C-P+D-S)/K + 1 = rt
((C-P+D-S)/K + 1)/t = r
Once you've priced against that discount rate then the IVs should be equivalent. However market effects like a borrow squeeze can alter this. For shorter term options with smaller interest rates and small dividends this is a good approximation.
In my intuition: Yes, in theory, they should be the same, but option prices are a product of supply and demand. Minor differences are to be expected between the two. If the difference is bigger than the spread + TC, I would say that (if the option is American,) maybe a speculation on an increase in interest rates can increase the value of a Put more than a Call. Looking forward to hearing the answer!!
Looking forward to the next vid
Interesting question, but I don't have the answer! But may I suggest a topic for a futrure video. As you know the US market is now having a lot of high yield etf. It would be very interesting to be able to evaluate the risk on some of those etf that use synthetic covered call strategy: writing calls on security that the etf do not owns!😁
Hey, do you know the best place to find monthly fundamental data for stocks, over the span of decades? For back testing. And one that takes into account survivorship vials for delisted stocks.
Just a guess: since the world is primarily long, puts are more often bought for tail protection, and therefore carry a volatility premium.
Great video. Loved it ❤️
I forward your question to ChatGPT4, and here is the reply:
"Yes, in a perfect world without arbitrage opportunities, the implied volatility for a call and a put with the same strike price and expiration should be the same. This property is a result of put-call parity, which is a fundamental principle in options pricing that defines a relationship between the price of European put and call options of the same class (i.e., with the same underlying asset, strike price and expiration date).
However, in the real world, slight discrepancies can occur due to factors such as bid-ask spreads, transaction costs, and liquidity issues. These differences, while typically small, can result in slightly different implied volatilities when calculated from observed market prices of put and call options.
That said, if you see a significant difference between implied volatilities of a put and a call with the same strike and expiration, it might indicate an arbitrage opportunity, a problem with the data, or a violation of some assumption of the Black-Scholes model or the conditions required for put-call parity to hold."
thanks for your site with code examples
Is it possible to calculate iv in Excel sheet sir ..pls make a video on implied volatility 🎉
Hi everyone, can someone ask this important question ,please ?:
If you buy a call/put option that only has intrinsic value, then you can almost forget about Theta an IV because the option price movement will not be affected by them?
is that right? :
Theta and IV only applies to the extrinic value part and not to the intrinsic value part of the price of the option?
Else, if you buy a call/put option with both intrinsic and extrinsic value, but, the amount of intrinsic value is bigger than the extrinsic value , you can only lose money if your option ends OTM?I mean, even if end up losing all the extrinsic value, because your option ends ITM (you get right the direction of the stock movement) , still has intrinsic value (and bigger than the one it had when you bought it)
You can only lose (because of theta and IV) the extrinsic value part , not more than that?
Thanks in advance
in the formulae for realized vol he assumed the returns had zero mean?
What i'm really confused about is when you're making this API call is understanding whether this is a 4 dimensional array? Said differently, for each t_i are you returning, for that day, ALL the strikes for MSFT between 13:00 and 14:00? (thus 4 dimensional as you'd have the 'smile' for each option on that day at that time ) OR are you returning only the strike prices of ATM options on MSFT between 13:00 and 14:00? Sorry, may be a silly question
Clients' life plans could be the reason of the premium difference.
(๑˙❥˙๑)
3:35 A small mistake here, in d1, it should be (r+sigma^2)T.