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Collar built with Calls vs with Puts, P-C Parity Question
Posted: November 3rd, 2003, 7:07 pm
by swapster
Assume one builds a collar with calls (long a call at strike K1, Short a strike at K2)Also, one builds a collar with puts (Short a put at K2, Long a put at K1)Although these structures look the same in terms of P&L graphs, why does the call structure cost more than the put structure?Since, the price of C (K1) > C ( K2) , and we are buying at K1 and selling at K2, this gives a negative payout.And, the price of P (K2) > P (K1), and we are selling K2 and buying K1, this gives a positive payout.I know this has something to do with put-call parity.Please explain if possible..Many thanks.
Collar built with Calls vs with Puts, P-C Parity Question
Posted: November 3rd, 2003, 7:26 pm
by Graeme
They don't look the same on p&l graphs. In my picture (K_1 < K_2), the call structure is exactly K_2 - K_1 higher than the put structure. So presumably it costs exp(-rT)(K_2-K_1) more.
Collar built with Calls vs with Puts, P-C Parity Question
Posted: November 9th, 2003, 6:42 pm
by macavity
Put_Spread + Call_Spread= Discount_Bond.Why should a strip of PutSpreads be the same price as CallSpreads?Or have I missed something out here?
Collar built with Calls vs with Puts, P-C Parity Question
Posted: November 25th, 2003, 12:00 pm
by Oinker
This is a question for the General board.Get a basic option pricing textboook like Natenberg and review the basics of the differences between Calls and Puts, then call verticals and put verticals, then reversals and conversions...'Gotta know the plain vanilla stuff...