Loading...

Put Call Parity Violations in Cryptocurrency Options: Opportunities

by CryptoDataDownload


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






    • Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Author does not own the any crypto currency discussed. The information and content are subject to change without notice. CryptoDataDownload and its affiliates do not provide investment, tax, legal or accounting advice.

    This material has been prepared for informational purposes only and is the opinion of the author, and is not intended to provide, and should not be relied on for, investment, tax, legal, accounting advice. You should consult your own investment, tax, legal and accounting advisors before engaging in any transaction. All content published by CryptoDataDownload is not an endorsement whatsoever. CryptoDataDownload was not compensated to submit this article. Please also visit our Privacy policy; disclaimer; and terms and conditions page for further information.

    THE PERFORMANCE OF TRADING SYSTEMS IS BASED ON THE USE OF COMPUTERIZED SYSTEM LOGIC. IT IS HYPOTHETICAL. PLEASE NOTE THE FOLLOWING DISCLAIMER. CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. U.S. GOVERNMENT REQUIRED DISCLAIMER: COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
    Latest Posts
    Follow Us
    Notify me of new content
    About

    Step into the full potential of your cryptocurrency research and market analysis with CryptoDataDownload. Access free historical data in CSV format, unlock unusual option activity signals, explore Plus+ Python code examples (where every line of code is commented), and tap premium aggregated file resources and bespoke data sets. Trusted by academics worldwide, we offer comprehensive data to empower traders, researchers, and enthusiasts alike.

    Services
    Quick Links
    Contacts