Sure Shot Earning @ Put-Call Parity Concept.

Hi,
I'm updating an important concept of put call parity which is one of the most happening concept
in the derivatives market. Before you read further I hope you have some preliminary knowledge of options. Hope you'll love it.
So here we go....

Let start by an example of taking Nifty value.

Nifty Future at EOD is = 3110.
3100 CE(call european)=148
3100 PE (put european) =152

Letz start by how the value of call and put is derived.

Value of call/put= Intrinsic Value + Time Value

For call Intrinsic Value (IV)=3110-3100=10Rs
(Subtract Nifty Future with Strike price which is 3100 in our case)

Time Value= Just put the value of IV in above equation.

i.e Value of call= 10+Time value
which gives time value to Rs 138.

Similarly

Value of Put
152= 0 + 152.
Note here future is greater than strike price of put 3100 so we will say that Intrinsic value of
3100 put is Zero, and rest is purely time value. That means for the same strike market is valuing call =138 and put=152. So logic is that market is overvaluing put, it may or may not be bearish indicator. Our purpose is to make a sure shot gain by this beautiful concept.

So now what you have to do is compare the time value of both the options.
Between 138 - 152 the difference is of Rs 14 and that is our sure shot gain.

So what you do:
Short Future, Short Put(sell the put) and buy call. (Note gains only on expiry/ or if valuations are good then you can reverse your positions.

How you do it.

There is a simple equation on Put-Call Parity which goes like this:

Nifty Spot/Future + Put - Call = Exercise/Strike Price.

This equation says that both side RHS and LHS should be equal and if there is in inequality
there is a gain to be made which is the outcome of sentiments given by the public.

So taking our example

Future+Put=Strike-call.


3110+152=3100+148

3262 is not equal to 3248, so difference is our gain to be made.

Thumb Rule is

Short the greater side, i.e short future, short put.
and long the lesser side which is 3100 call.

Now check your payoffs at any Nifty points there will always be gain of 14 Rs and you will never
make loss. Same equation can be used for stocks too.

Hope you like it.
Happy Trading.