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Question By Gene T.
"What Does It Mean When Call Prices Are Higher Than Put Prices?"
I noticed today that the QQQQ Call options prices are higher than its put options of the same strike prices. Shouldn't call options and put options of the same strike price be of the same price? What does it mean when they are not?
Asked on 11 May 2010
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Answered by Mr. OppiE
Hi Gene,
Indeed, all else equal and when put call parity is strong, call options and put options with strike prices the same distance from the underlying stock price should be equal or at least very near equal. For instance, if a stock is $10 and its $9 strike price call option is $1.10, its $11 strike price put option should also be $1.10 as both are $1 in the money (same distance from underlying stock price). However, put call parity isn't always strong and implied volatility is rarely the same for call and put options.
Why is this so?
Basically, stocks are usually going somewhere, including the QQQQ. As long as it seems to be going or is expected to go in one direction, implied volatility of options in that direction would increase. For instance, if the QQQQ is expected to make a strong topside breakout, the implied volatility of its call options would be much higher than its put options, making the price of call options higher than put options. Vice versa for put options.
However, call options can also seem to be more expensive than put options when the distance between its strike price isn't exactly the same as its put options. For instance, the QQQQ is $47.77 today and if you look at its nearest out of the money call and put options, you will see that the $48 strike price call options are $0.77 and its $47 strike price put options are only $0.65. Both options are one strike out of the money but both have different extrinsic value due to the fact that the $48 strike price call options are nearer to the prevailing price of the QQQQ than the $47 strike price put options. At the money options have the highest extrinsic value of all options of the same expiration month, as such, call options being more expensive than put options in this case is totally normal. It does not mean that the QQQQ is poised for topside breakouts. In this case, you could compare the call options and put options price against the theoretical price generated by the Black-Scholes Model in order to see which one is relatively more expensive versus its theoretical value.
In conclusion, comparing the price of call options and put options is only meaningful when the strike price of the call options and put options being compared are exactly the same distance from the price of the underlying stock. Otherwise, you should only compare them against their theoretical values generated by the Black-Scholes Model to see which is relatively more expensive compared with their theoretical values. In either case, there is no guarantee that a higher call price means the underlying stock is necessarily going up nor a higher put price means the underlying stock is going down. The probability will be higher but there is no guarantee. As such, it should not be taken as the only means by which you determine which direction a stock is going.
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