WDIS: Two Yutes - Beginner Options Trading

Put-Call Parity and the ZEBRA

| Aug 27, 2021
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    WDIS: Two Yutes - Beginner Options Trading

    Put-Call Parity and the ZEBRA

    Aug 27, 2021

    Bat steps in for Tom today and adds a few new tools to the two yutes’ collective toolbelt.

    He first explains the concept of put-call parity which allows us to extract the extrinsic value of the in-the-money side of the options chain, from the out-of-the-money side (other type of option)...


    DIDI’s $5 call is worth $3.40. Most of this is intrinsic value since it’s an ITM option. We can quickly figure out how much is extrinsic value but looking directly to the other side of the option chain at the $5 put option price. There is NO intrinsic value in this put because it’s OTM. The bid and ask are at $0.15 and $0.20, so we know that the extrinsic value in the $5 call is somewhere around $0.15 or $0.20 (you can confirm this if you have your “Ext” column turned on).

    Bat then introduces the yutes to a new strategy: The ZEBRA (Zero Extrinsic Back Ratio). This strategy mimics a long stock position, but requires significantly less capital. The ZEBRA consists of:

    • Two long 70 delta options
    • One short 50 delta option (of the same kind)

    It gives you about a 1:1 shot of making money, but your risk is defined to the downside and your profits unlimited to the upside (like owning stock!). Tony says it’s good to keep selling premium, but every once in a while it’s healthy to take a 50/50 shot where you can make a hefty profit.

    Watch to learn more about this fascinating strategy.

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