OptionsPhysics 101: Put-Call Parity

It's great to be able to share this 2008 article again -- because I thought it was lost forever!

Put-call parity is much more than the dry mechanics of options. It is the underlying symmetry of corporate finance.

Before options became the building blocks of modern derivatives -- before Black-Scholes, the "greeks," and volatility arbitrage -- calls and puts were as simple as two sides of a coin, and as complex as two halves of an apple.

In fact, to get the job as a retail options educator at PEAK6 in 2007, I made a video series for them where I cut an apple in half and demonstrated how the "put" side and the "call" side were different, but also interchangeable.

They could be used in a variety of ways to "synthetically" recreate not only the underlying stock, but also each other.

I realized there was a fundamental, mechanical symmetry to options that everyone needed to grasp before playing with gamma curvature and implied vol.

That experience gave me the idea to name my brand of education "OptionsPhysics" -- despite the fact I grew up "allergic to algebra" and never took calculus!

The parallels were everywhere, just screaming to be named. From the legendary apple that fell on Newton's head to the Brownian motion that would inspire Black, Scholes, and Merton 300 years later to create a dynamic model of partial differential equations for the real-time pricing of options and their derivative functions (the greeks).

19th Century Creative Finance

For anyone who is still bored at this point in the discussion, I tell them the story of a 19th century railroad tycoon named Russell Sage who used this knowledge to create an illegal loan where he could charge "usurious" interest without bankers noticing.

I wrote "In effect, Sage went synthetic to avoid sin." You can read that story in the PDF you are about to download.

This explains how the theoretical concepts of puts and calls are fundamental to corporate finance. As pro options traders in Chicago are fond of saying...

"Calls are puts, and puts are calls. But buys are not sells."

Most thinking people begin to understand and start to see derivatives in new ways — and not as financial WMD — especially when it matters so much to them what Michael Saylor is doing with convertible debt at MicroStrategy.

Bernie Junior Steals $200 Million

Now, if even you are bored to tears by all this put-call corporate finance talk, check out this story: I thought this article was lost forever because the magazine publisher, Russell Wasendorf of FCM broker PFG Financial, got caught in his own Bernie Madoff scheme and the website for SFO (Stocks, Futures, & Options) was shut down.

Can provide more details on that wild story if you're interested!

So I felt lucky over the holidays to find a magazine hard copy in some old boxes in my barn. And now here is the PDF I just scanned.

Finally, I had to work with a magazine editor at the time in 2008 who did not understand options. So there were many debates about word choice, sentence flow, length, and even my title. I won most battles except the last.

I wanted to call it "OptionsPhysics" to establish my brand, but she wanted something less intimidating. Thus "The Balancing Act."

My point is that there could still be "shortcomings" in this article. I need to read it fully again myself a few more times, but I wanted to share it as it was.

So by all means feel free to ask questions, point out confusing sections, or make suggestions. I love the topic and will talk about it for hours because it is the foundation all else rests on.

The Fundamental Structure of Options... Opens and Blows Minds

As I've discussed on Twitter/X with some traders, there is a paucity of fundamental options education among new traders buying MSTR calls and playing with the ginsu knives of gamma curvature and IV before they can even cut an apple in half with a butter knife.

Plus we have "tradfi" folks still grappling with the evolution of money, banking, and credit systems. Here are two of my strong beliefs at this intersection:

1) Options fundamentals and Black-Scholes are essential to a corporate finance and derivatives knowledge base. They help minds evolve from TradFi to BitFi. They are the bridge from fiat fragility to digital durability.

2) The more we have articulate, sound-money "Bitcoiners" who also master #1, the stronger the industry and its institutions will be. Like me, who never took calculus, suddenly grasping in my 30s the beauty of second-derivative curvature (gamma) in everything, from roses and rainbows to radios and rockets.

In fact, it took until March of 2024 for me to fully "get" Bitcoin after hearing Michael Saylor speak. His grasp of capital markets, finance/derivatives, and economic history grabbed my attention. He spoke my language and was the only one who could persuade me.

And so I want to share that shared language of derivatives.

Enjoy!

Kevin B. Cook