I am trying to understand a certain investing strategy involving options. In the example I'm looking at, it seems one can obtain a stock for less than its market price, so there must be something I am missing.
Say I think stock in company X will go up in value, and I plan to buy one share now and sell it in a year. But alternatively, I could choose some price c, buy one call option and sell one put option, both with strike price c and expiration in one year, then put c in escrow to cover the put. My total expense right now is (call option price) - (put option price) + c. At the end of the year, I exercise my call option if and only if the put option I sold was not exercised. The result is, at the end of the year, I have one stock in company X, which I then sell.
I just picked an example at random from an online broker that will sell me call options and let me sell cash-covered put options, and found that (call option price) - (put option price) + c is less than the cost of the stock right now. What's going on here? With call-put strategy, I get a discount on the stock price, so there must be a catch.
Edit: At the time I checked, my broker listed the following prices.
- Share price: $103.94
- Price to buy a call option with strike price $135, expiry 7/16: $0.63
- Price to sell a (cash-covered) put option with strike price $135, expiry 7/16: $32.28
If I purchase a call option, sell a put option, and put down $135 cash to cover the put, my net expense is $103.35, which is cheaper than buying a share directly.