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Arbitrage Strategies


Arbitrage Strategies

Put Call Parity / Call Put Parity

It is an optionpricing concept. According to Call-Put parity the price of underlying, Call Option, Putl Option and Future should be in equilibrium. If they are not in equilibrium then Call-Put parity exits and we can take arbitrage opportunities.

The basic formula for checking Call-Put parity is as follows:

C - P – F = 0

Where, C = Call price ; P = Put price ; F = Future price ; X= exercise price

Here, in this formula we are taking assumption that there are no carrying costs for options.

Volatility Spread

Example...

Front Spread
Type Spot Strike Quantity Vol Days to Expiry Delta Pos. Delta
Call 15600 15500 1000 14% 29 0.6635 663.5
Call 15600 15700 (1000) 16% 29 (0.334) (334.0)
            0.3295 663.5
Future 15600   (327)     (1) (327)
            0.0004 0.4

In above example, the volatility of the longCall is 14 % and volatility of shortCall is 16 %. Moreover for Volatility spread we keep deltaneutral using Future..






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