European Options and Fixed Cost Spreads - Theoretical Economics Letters

TEL > Vol.13 No.3, June 2023

Theoretical Economics Letters

Volume 13, Issue 3 (June 2023)

ISSN Print: 2162-2078 ISSN Online: 2162-2086

Google-based Impact Factor: 1.19 Citations h5-index & Ranking

European Options and Fixed Cost Spreads ()

HTML XML

Download as PDF (Size: 280KB) PP. 451-461

DOI: 10.4236/tel.2023.133029 64 Downloads 283 Views

Author(s)

Sunil K. Parameswaran^1*, Sankarshan Basu^2,3

Affiliation(s)

¹CEO Tarheel Consultancy Services, Manipal, India.
²Indian Institute of Management, Bangalore, India.
³Dean Amrut Mody School of Management, Ahmedabad University, Ahmedabad, India.

ABSTRACT

This paper revisits the put-call parity condition for European options, on both non-dividend paying and dividend paying stocks, in the presence of fixed costs spreads. It demonstrates that the put-call parity condition becomes a set of inequalities under these conditions. A model patterned on the Roll model for fixed cost bid-ask spreads is postulated, and its estimation using a generalized method of moments (GMM) approach, is suggested. Finally, the paper demonstrates that in the presence of bid-ask spreads, European options on non-dividend-paying stocks may have a negative time value, unlike the case of such options in the absence of spreads. Also, due to the presence of such spreads, there could be situations, where both calls and puts with the same exercise price are simultaneously exercised.

KEYWORDS

European Options, Put-Call Parity, Fixed Cost Spreads, Generalized Method of Moments Estimation, Negative Time Value for Deep-in-the-Money Calls

Share and Cite:

Parameswaran, S. and Basu, S. (2023) European Options and Fixed Cost Spreads. Theoretical Economics Letters, 13, 451-461. doi: 10.4236/tel.2023.133029.

Cited by

No relevant information.

Journals Menu

Follow SCIRP

	+1 323-425-8868
	customer@scirp.org
	+86 18163351462(WhatsApp)
	1655362766

	Paper Publishing WeChat

Journals Menu

Home

About SCIRP

Service

Policies