Put-Call Parity Arbitrage: CNBC Explains
By: CNBC Explains
In previous videos, we’ve seen that when put-call parity is broken, risk-free arbitrage opportunities may exist. In short, buying a stock and a put option should have the same value as a call and a bond at the same expiration date. When this relationship is out of balance, price discrepancies reveal an easy way to make money. Salman Khan of theKhan Academy explains how this opportunity works, and how to execute it.
From this first video, you’ll understand:
- The rationale behind exploiting put-call parity arbitrage
- How to take advantage of discrepancies in put-call parity
From the second video, you'll understand:
- How the put-call equation balances out
- The put-call parity relationship in depth
Put-Call parity demonstrates the relationship between shorts, puts, calls, and bonds. The proper combination of each can yield equal payouts. This relationship is valuable to know for investors who can identify when the put-call parity is out of sync, taking advantage of arbitrage opportunities. Salman Khan of the Khan Academy explains.
