Dollars and Jens
Thursday, April 29, 2004
put-call parity
Hey, Steve, I don't suppose you remember last year when I was wondering whether options on stocks on which a short-squeeze was likely would imply an underlying price lower than the actual price? Well, it's happened with bond ETFs.
Why were the at-the-money put options with a strike of 84 over three times as expensive as the call options at the same strike? Why didn't an arbitrageur sell the 84 puts for $9.00, buy the 84 calls for $3.00, sell short the underlying TLT at 84 and pocket $6.00?

The answer is that there were no available TLT shares to short. Demand for hedging against a drop in long bonds apparently has far exceeded supply.
It still makes you wonder, though, who's sitting on the ETF shares rather than trading them in for an options position.

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