Arbitrage When a Call Is Overvalued Under Put-Call Parity

Summary

The document describes a proposed arbitrage when a call option is overpriced relative to the underlying under put-call parity. The answer says the trade requires a put with the same strike: sell the call, buy the put, and buy the underlying. The combined short-call and long-put position is treated as equivalent to a short position in the underlying, allowing the underlying purchase to offset that exposure.

The explanation frames the paired options as synthetically selling the underlying at a price above its market price, then buying the underlying to close the net exposure and lock in a profit. It is a brief conceptual explanation, with no numerical example or detailed parity equation. It does not discuss expiration matching, financing, dividends, exercise style, transaction costs, or execution constraints, all of which matter when assessing whether an apparent price discrepancy is a realizable arbitrage.

Key ideas

• The proposed parity trade requires a put with the same strike as the call.
• The strategy sells the call, buys the put, and buys the underlying.
• The paired option positions are described as synthetically shorting the underlying.
• The explanation omits costs and contract details that affect real-world arbitrage.

Tags

# Call Option Overvalued and put-call parity


# Call Option Overvalued and put-call parity












I have a question regarding if a Call option is overvalued compared to the call price and how you can benefit from the Arbitrage opportunity.

My thoughts are as follows:

Step 1: Short the call option Step 2: Borrow money to buy the underlying Step 3: Buy the underlying

Theoretically, have i understood the correct move in this situation and could someone provide a simple example?

## Answer by ZRH (score 2)

https://quant.stackexchange.com/a/44694

In order to set up an arb, you always need to be able to trade a put option with same strike.

(1) you sell the call option (2) you buy a put option of the same strike (3) you buy the underlying

(1) & (2) is equivalent to selling the underlying (long call & short put = short underlying), which you then effectively sell at a higher price than it is traded in the market for the underlying.

By buying back the underlying (3), you completely net out your position and lock in the profit

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