Call-Put Parity
P + S = C + E * [1/(1+i)] ^n where:
P = the market price of the put
S = the market price of the stock
C = the market price of the call
E = the exercise price of both the call and the put
i = the risk free rate ( taken as 5.5 %)
n = the number of years until the expiration date of the options
Thus, if P + S > C + E * [1/(1+i)] ^n, you should buy calls because their value must increase for the equation to balance.
On the other hand if P + S < C + E * [1/(1+i)] ^n, you should buy puts.
For Example -
For the March series, we find Call Option should be purchased for strike prices of Rs. 720 and 740.
|
Strike Price
|
Difference
|
|
720
|
18.19
|
|
740
|
5.74
|
For the March series, we find Put Option should be purchased for strike prices of Rs. 760, 780, 800, 820, 840, 860, 880 and 900.
|
Strike Price
|
Difference
|
|
760
|
15.3
|
|
780
|
4.25
|
|
800
|
4.89
|
|
820
|
2.1
|
|
840
|
3.79
|
|
860
|
4.84
|
|
880
|
9.79
|
|
900
|
32.64
|