Put-call parity

This game tests your understanding of put-call parity. The value of puts and calls in this game is linked by put-call parity. So, the only difference between the value of the put and the call is the intrinsic value of the option. Let’s work through an example.

Spot:               268.59
Call value:        12.61
Put value:        11.02
Strike:             ???

Here we need to calculate the Strike price of the call and the put. We reason as follows:

i) The call is in-the-money, since it is worth more than the put.

ii) The intrinsic value of the call is the difference between its value and that of the put. Therefore intrinsic value = 12.61 – 11.02 = 1.59

iii) The strike of the call must therefore be the spot price minus the intrinsic value i.e. 268.59 – 1.59 = 267

We are making use of the following rule that stems from put-call parity:

Abs difference between Put and Call value = Abs difference between Spot Price and Strike

Once this is understood, it is just a case of realising whether the call or the put is more valuable (due to being in-the-money) and whether the strike is above or below the spot price.

A good option trader will have no trouble calculating put-call parity in his head. Practise with the Put-call Parity Volcube Mini-game until you can calculate the answers very rapidly and accurately.

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