THE RELATIONSHIP BETWEEN PUT AND CALL OPTION PRICES

THE GROWTH IN THE VOLUME of stock market activity and the increased sophistication of investors has brought with it greater interest and activity in the related, albeit more complicated, put and call option market. The put and call market is a kind of futures market in stocks (with important differences) which has never generated the volume of trading activity of the commodity futures markets. As the stock market continues to grow, this situation is, however, likely to change. Options are "negotiable contracts in which the writer, for a certain sum of money called the 'premium,' gives the buyer the nrght to demand within a specified time the purchase or sale by the writer of a specified number of shares of a stock at a fixed price called the 'contract price.'"1 A put is an option to sell. A call is an option to buy.2 Options are written for units of 100 shares, and the contract price is typically the market price of 100 shares of stock at the time at which the option is written. The standard maturities are 30, 60 and 90 days, and 6 months 10 days, although any maturity less than one year can usually be negotiated. The aim of this paper is to formulate and test empirically some hypotheses about the relationship between put and call prices (or premiums). No attempt will be made to formulate a theory of the determinants of the level of put and/or call prices. This more difficult problem has been investigated by others.3 It is clear, however, that, in a general way, the level of a put or call price will depend on the probability distribution of stock price changes expected during the option period. If the stock price has a chance of increasing greatly during the option period, calls will sell at a relatively high price. If