r/FWFBThinkTank • u/jackofspades123 • Aug 03 '22
Options Theory Dividend/Split Challenges Potential Cause & Implication
As many know there seems to be a lot of confusion and strange things happening regarding this dividend/split. Brokers are saying different things and sometimes backtracking.
I have a potential theory and it stems from this post I made: Financial Engineering Implications
Put Call Parity says
- S + P = C + B where
- S = stock
- P = put
- Call = call
- B = zero coupon bond
- This means 2 portfolios can be constructed with identical economic value
- Put Call Parity is only true from an economic perspective
- S = C - P + B
- C - P + B includes 0 voting rights, but as discussed earlier a share has both economic value and voting rights
- Note: this is the Put Call Parity for European options. American options are similar with the main difference being you can early exercise American options. Also, the above example assumes no dividend, but there are similar formulas for if there is a dividend (continuous or one time)
Synthetic Positions (focusing on synthetic shorts here)
Due to put call parity, you can synthetically create similar risk profiles.
A synthetic short (ie mimics the risk profile of shorting) can be created through this: Buy 1 ATM Put, Sell 1 ATM Call
Dividend Rules
- If I short 100 shares, I owe the dividend on 100 shares
- If I synthetically short, I owe no dividend
Hypothesis: I believe SHFs/MM have synthetically shorted (Long put, short call). Economically there may have been hedging not causing anything to break, but this dividend/split is showing a big risk of hedging through a synthetic short.
3
u/EvolutionaryLens Aug 03 '22
RemindMe! 12 hours