Put-Call Parity
Put-call parity is a fundamental principle in options pricing that defines a specific relationship between the prices of European put and call options with the same strike price and expiration date. The concept is predicated on the idea that holding a call option (which gives the holder the right to buy an asset at a specified strike price) while also selling a put option (which obligates the holder to sell at the same strike price) should be equivalent to holding the underlying asset itself, provided that the strike price is adjusted for the present value of the strike price (assuming no dividends - which is the case for crypto).
Here’s the classic put-call parity formula for European options that works for both non-dividend stocks and cryptocurrencies:
The intuition behind put-call parity is risk arbitrage. If the prices were out of alignment, arbitrageurs could exploit this opportunity for a risk-free profit, buying the undervalued position and selling the overvalued one until the prices come back into parity. (One side of the equation is greater than other or vice versa).
The Highlights
Some research has been done analyzing the put call parity principle in the Binance derivative markets and here are some of the top takeaways:
Arbitrage Opportunities - Even retail investors should have opportunities to earn arbitrage profits
Tradable Opportunities - arbitrage opportunities presented ~10% of the time.
Trading at Spread - Trading in real life requires trading at the bid/ask spread, and the size of the spread at some option strikes can be quite large. This can certain limit practically taking advantage of a PCP violation. Accounting for the bid/ask spread materially reduces the number of PCP violations.
Market Maturity - Compared to SPX options, cryptocurrency options markets (on Binance) are not yet in a mature state
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