Not totally sure how this work. If a call is under priced, do you buy a covered call and short a protective put, remaining hedged but taking the spread? Or do you buy the Call option and sell a synthetic call? Or is this only used to find out if the call is properly priced and you go with the first option if their is a difference?
Buy low, sell high, this seems like a put call parity question Sinc PCP is C + [RF/(1+r)T] = P+ S If the call is cheap, then C=P+ S - [RF/(1+r)T] Buy stock, buy put, short bond… Watch the signs + is long - is short… At completion you would settle the components of the synthetic call option and when it all washes out, you make the spread.
When do we ever use covered calls and protective puts for arbitrage then? Anybody on here not trying to figure NI under the Equity method?
I think that’s just their name. I could be wrong… Also a protective put is a put that protects the value of a stock and a covered call is a debt instrument protecting the value of the call, the call is “covered” by the debt instrument creating a floor and the put protects the stock providing a floor… either is a hedge of each other in and of itself…