Arbitrage Spreads
Chapters in this video
- 0:00 Exploiting mispriced put-call parity, not direction
- 1:45 Synthetic futures: the put-call parity clone machine
- 3:43 Conversion mechanics and overpriced calls
- 4:51 Reversal mechanics and underpriced calls
- 5:44 Side-by-side conversion versus reversal matrix
- 6:14 Memory aid: always trade against the mispriced call
- 7:00 Exam trap warnings: swapped legs and directional bait
- 8:18 Rapid-fire exam recap
What this video covers
- What put-call parity (PCP) means for options on futures, and why a synthetic position built from a call and put must equal the real futures contract
- How a synthetic long futures is created from a long call plus short put at the same strike and expiration
- The exact construction of a conversion: long futures, long put, short call, and why it is used only when the call is relatively overpriced (options rich)
- The exact construction of a reversal: short futures, long call, short put, and why it is used only when the call is relatively underpriced (options cheap)
- Why each spread is hedged and near-riskless, with directional risk eliminated because the real leg and synthetic leg cancel each other
- The memory aid "always trade against the mispriced call," and how to mechanically apply it under exam pressure
- How the exam baits you with swapped legs or directional rationales, and why treating these as market-view trades misses the entire concept
Read the full lesson, free
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