Chapter 21: Options Basics: Calls, Puts & Payoffs

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We're jumping straight into a pop quiz today.

Oh, go ahead.

Because the source material we're diving into, it kicks off with this fantastic riddle that honestly, it just sets the stage for the entire discussion.

I'm ready, go for it.

Okay.

What do these four seemingly totally different events all have in common?

Listen closely.

Listen.

First, a big chocolate maker, Hershey, buys options to put a ceiling on their cocoa cost.

Second, a tech startup, Flatiron, offers its president a bonus if the stock price goes above $120.

Okay, so commodities and compensation, very different.

Exactly.

Third, a power company, Dominion, installs a unit that can burn either fuel oil or natural gas.

And finally, Singapore Airlines issues debt in the form of convertible bonds.

Wow, that is a wonderful, almost chaotic list.

I mean, you've got risk management, executive pay, core operational strategy, and then complex financing.

They seem like they belong in completely different chapters of corporate finance.

And yet the one single thread, the one concept weaving through all of them is the option.

That's the answer.

And that's what we're doing today.

We are taking a deep dive into options, drawing from chapter 21 of Principles of Corporate Finance.

Right.

Our mission is to take what a lot of people see as one of the most complex, maybe even arcane, pieces of the financial puzzle and just break it down.

Make it simple.

Make it simple.

We need to understand how they work, how they're valued, and how they become these building blocks for really sophisticated financial decisions.

Okay, let's unpack that right away because I think a lot of our listeners might hear options and just picture people shouting on the floor of the Chicago Board Options Exchange.

Right, high stakes trading.

Why should a financial manager sitting in a boardroom worried about a capital budget care so much about these things?

It's absolutely central.

And often the option isn't something you explicitly buy on an exchange.

It's implicit in the decision you're making.

If you get your head around options, you get the value of flexibility.

And risk management.

And risk management, which, I mean, those are cornerstones of good corporate finance.

And the source material gives us four really powerful reasons why this framework is just critical.

Okay, lay out those four pillars for us.

First up, we have real options.

This is a concept we've touched on before.

The source points back to chapter 10.

Right.

But the point is that nearly every big corporate investment has an embedded option inside it.

It gives the manager flexibility.

Like the power plant example you just mentioned.

Precisely.

That plant that can switch between oil and gas, it's not just one static asset.

It's actually two assets plus an option to switch.

Ah, so if gas prices spike.

The manager has the option, but not the obligation, to just start burning fuel oil instead.

And that flexibility, that choice, has a real measurable value.

So think about, say, buying a piece of land next to your new factory.

Perfect example.

You pay a bit extra for that land today not because you need it now, but because you're buying the option to expand in five years if your market just explodes.

And without pricing that option to expand, or I guess the option to abandon a failing project.

You'd be undervaluing the whole investment decision from day one.

So it elevates the whole capital budgeting process that's huge.

What's the second reason?

Second, options are frequently just, well, tacked on to corporate securities.

This is the Singapore Airlines example with the convertible bonds.

Exactly.

When you issue a convertible bond, you're giving the holder the option to swap their debt for a common stock later on.

It just gives you flexibility in your capital structure.

Warrants are another example, basically long -term call options attached to a bond to, you know, sweeten the deal for investors.

So it's a structural component.

It changes the risk and reward for the investor, and that lets the company raise money on better terms.

Exactly, they're structural tools.

The third reason, though, this one is, I would argue, the most profound.

It totally reframes how you should think about a company's liabilities.

Corporate liabilities themselves implicitly contain an option.

You're talking about limited liability for shareholders here, aren't you?

Yes, but seen through the lens of an option.

When a company borrows money when it issues debt, it implicitly gets an option to default, an option to just walk away and hand the assets over to the bondholders if things go south.

Wait, hold on, let me make sure I'm getting the gravity of this.

So if the company's assets are worth less than its debt, the shareholders can just walk away.

They file for bankruptcy, the bondholders get what's left, and the shareholders' loss is just capped at whatever they invested.

Correct, so look at it this way.

Shareholder equity, the value of the shares, is effectively a call option on the firm's total assets.

Wow, okay, so the assets are the underlying thing you can buy.

Right, and the debt that you have to repay, that's the exercise price.

If the assets are worth more than the debt, the shareholders exercise their option, they pay off the debt and keep the rest.

If the assets are worth less, they just let the option expire worthless, they default.

That is a serious aha moment.

It means this whole framework we're about to learn for simple traded options applies directly to valuing the equity and debt of an entire company.

It's the unifying theory.

If you understand the option payoff, you understand the fundamental dance between shareholders and debt holders.

Okay, so that's three.

What's the fourth and final reason?

Risk reduction.

We're back to Hershey and the cocoa.

We are.

Firms face all sorts of risks.

Commodity prices, currencies, interest rates, they use options all the time to limit that exposure.

A meatpacking company might buy an option to purchase cattle at a fixed price.

So it puts a ceiling on their costs.

Exactly, it's insurance.

It protects them from a huge spike in cattle prices, but, and this is the beautiful part, it still lets them benefit if prices fall.

They just don't exercise the option.

It's insurance that lets you keep the upside.

It's financial insurance.

So you see, options are everywhere.

In real assets, securities, liabilities, risk management.

To get modern corporate finance, you have to get options.

So where do we start?

What's the roadmap?

We've got it in three bite -sized pieces.

First, the basic building blocks.

Calls, puts, and shares.

We'll map out their payoffs.

Second, we'll get into what the book calls financial alchemy, combining these blocks to create brand new things.

And third, we'll figure out what actually determines the value of an option before it matures.

All right, let's start with those building blocks.

When we talk about options on an exchange, we're talking about derivative instruments.

That's the key term.

They're called derivatives because their value is derived from the price of something else.

An underlying asset.

Right, like a share of Google stock or the price of wheat.

It's basically a side bet between two investors.

Amazon itself isn't usually involved when options on its stock are traded.

And there are two main types.

The call and the put.

Let's do the call option first.

Define its core parts for us.

Okay, a call option give its owner a very specific power.

It's the right, and this is crucial, but not the obligation.

Right, not the obligation.

Do buy a share at a specified price.

We call that the exercise price or the strike price.

And you have to do it on or before a specified maturity date.

I wanna really zero in on that right but not obligation phrase.

Yeah.

That's everything, isn't it?

That's where the value comes from.

You get all the upside if the price rises, but you don't have to buy if it falls.

Exactly.

It gives the holder the freedom to choose.

If it's not profitable to exercise, you just let it expire.

The most you can possibly lose is the price you paid for it upfront, the premium.

And we should probably distinguish between the timing, the whole European versus American thing.

Good point.

A European call can only be exercised right at maturity on that one specific day.

An American call, which is much more common for stocks, can be exercised any time you want, up to and including that final maturity date.

And it's important to say this has nothing to do with geography, right?

Nothing at all.

You can trade European style options right here in America.

It just refers to the exercise rule.

Okay, to make this real, let's use the Amazon example from the source material.

This is back in January, 2020.

And the stock price, let's call it S, was around $1 ,830.

Right, and the book gives us this great table, table 21 .1, which immediately shows you how the exercise price matters.

Okay.

If you look at an option to buy Amazon for $1 ,700,

a pretty low exercise price, it was expensive.

It cost about $183.

Right.

Now, compare that to an option to buy for $1 ,750, just $50 higher.

That one costs much less, about $150.

So the takeaway is pretty clear.

The value of a call option goes down as the exercise price goes up.

Makes perfect sense.

The less you have to pay in the future to get the stock, the more that right is worth today.

So now let's flip that.

Let's hold the exercise price steady and look at how time affects the value.

Okay, let's look at the options that are at the money, meaning the exercise price is right around the current stock price, so $1 ,830.

Got it.

The April 2020 call cost about $90.

The July call cost $146.

And the one that went all the way out to January 2021, that cost over $200.

So the intuition here is just as strong, but it's the opposite.

The option price goes up the more time you have until it expires.

Of course.

More time means more chances for the stock to do something amazing, to soar way past $1 ,830.

It just means more opportunity, and that opportunity has value.

Okay, so that's the call.

Let's define its counterpart,

the put option.

A put is simply the reverse.

It's the right to sell the share at a specified exercise price.

So if I buy a call, I want the stock price to go up.

If I buy a put, I am betting on, or at least hedging against, the price going down.

Exactly.

You want the share price to crash.

If the stock falls to $1 ,500, you can buy it on the open market for $1 ,500 and then immediately use your put to force someone to buy it from you at the higher price of $1 ,830.

That difference is your payoff.

Before we get to the payoff diagrams, let's just lock in the terminology analysts use for this.

The whole concept of moneyness.

Right, moneyness just tells you what the option would be worth if you exercised it right this second.

It's a quick snapshot of its intrinsic value.

So an option is in the money if exercising it now would make you money.

Right, for a call, that means the stock price is above the exercise price.

For a put, it's the other way around.

The stock price is below the exercise price.

And it's out of the money if you lose money by exercising.

And at the money, if it's basically a wash.

Exactly.

In that Amazon example, the $1 ,700 call was already in the money by $130.

But a $1 ,900 call was out of the money, yet it still had value because of the time left.

The chance it could become in the money.

Now we need to look at the geometry of this because the payoff diagram is just so essential for understanding options.

It really is.

It simplifies everything by showing you exactly what the option is worth at maturity, depending on where the stock price lands.

Let's start with the call payoff diagram.

Figure 21 .1A in the source.

The shape is famous.

It's often called the hockey stick.

The payoff is just zero.

A flat line for any stock price below the exercise price.

Because you just wouldn't exercise it.

You'd let it expire.

But the second the stock price crosses that threshold, the payoff starts rising dollar for dollar with the stock.

It's a straight 45 degree line going up and to the right.

And that flat floor at zero, that's the right, not the obligation part.

You get all the upside, but your loss is capped.

Which the formula captures perfectly.

Equation 21 .1 says the value of a call at maturity is simply the maximum of S minus EX or zero.

Max EX.

You take whichever is bigger.

So let's use the example.

If Amazon stock rises to $2 ,000 by maturity and the strike was 1830.

The option is worth 2 ,000 minus 1830, $170.

That's your payoff.

Okay, now the payoff diagram.

Figure 21 .1B.

Since everything is reversed, the diagram is just a mirror image.

It's a hockey stick pointing the other way.

So the payoff is zero for any price above the exercise price.

But once the stock price falls below EX, the payoff starts rising as the stock falls further.

And the formula equation 21 .2 is just a mirror image too.

The maximum of EX minus S or zero.

EXS, yep.

So if Amazon crashes to 1630, your 1830 put is worth $200.

You buy the stock for 1630 in the market and use your put to sell it for 1830.

Okay, we spent all this time on the buyer,

but for every buyer, there has to be a seller.

There does.

And this is where things can get a little scary.

The seller or the writer of the option has a very different position.

The buyer has the right, the seller has the obligation.

That's the key.

The buyer's asset is the seller's liability.

So if I sell a call, my payoff diagram, figure 21 .2A, is just a perfect upside down mirror image of the buyers.

You get to keep the premium they paid you, which is great, but you face a potentially massive liability.

And that liability is theoretically unlimited if the stock price just goes to the moon.

If you're forced to sell a stock worth $2 ,000 for only 1830, you lose $170 on that transaction.

The premium you collected softens that blow a little, but the risk is huge.

So who does this?

Who sells a naked call with unlimited risk?

Well, often it's someone who already owns the stock.

It's called a covered call.

They're just generating income.

And they're fine with selling their shares at that strike price.

If you sell a naked call without owning the stock.

You're making a very speculative bet that the price will stay flat or go down.

You are, a very risky one.

And the put seller,

their payoff is also a mirror image of the buyers, but the risk is different.

It is, their loss is capped, but it's still big.

If the stock goes to zero, the put seller is forced to pay the full exercise price, 1830 in this case, for a worthless share.

Their maximum loss is fixed, unlike the call seller.

Before we move on, the source material makes a really important point about a common source of confusion for students.

Yes.

The difference between a payoff diagram and a profit diagram.

This is so important.

The payoff diagrams, those hockey sticks, they only show you the value at the very end.

They completely ignore what you paid or what you received at the beginning.

Which is why the call buyers diagram can look like a sure thing.

Worst case is zero, but you have all this upside.

But that ignores the fact that you paid cash, maybe a lot of cash, for that right.

To see the real bottom line, you have to look at the profit diagram, since you're 21 .3A, where you subtract that initial cost.

So for that Amazon call that cost $146,

the buyer only actually makes a profit if the stock price rises above the breakeven point.

Which is the exercise price, 1830, plus the premium, 146.

So 1976 and change.

Below that, even if the option pays off, you're still in the red overall.

And for the put seller, their payoff diagram looks terrifying.

But the profit diagram shows they have a buffer.

They keep the premium unless the stock falls enough to wipe it out.

Right, and the reason financial pros and valuation models stick with the payoff diagram is that the goal of the model isn't to calculate your profit.

The goal is to figure out what that initial price, that premium, should be today.

Got it.

Payoff is value at the end.

Profit is value at the end, minus what you paid at the start.

Okay, so now we get to the fun part.

The part the book calls financial alchemy.

I like the sound of that.

This is where we see that options, stock, and just basic borrowing and lending are like Lego bricks.

You can use them to build almost any financial structure you can imagine.

And the goal, as shown in figure 21 .4, is to create downside protection.

You start with the payoff of a simple stock, a straight line up and down.

You win or lose dollar for dollar.

And the alchemy is turning that into a structure where you keep all the upside, but you put a hard floor on the downside.

So let's look at strategy one, the most intuitive way to do this, the protective put.

This is basically just buying insurance on your stock.

It is, the combination is simple.

You buy a share and you buy a put option with the same exercise price, say 18 .30.

Okay, let's trace the payoff.

If the stock price goes up way above 18 .30.

Your put is worthless, you just let it expire, and you enjoy all the gains from owning the stock.

But if the stock price crashes, down to say $1 ,000.

Now your put is incredibly valuable.

You just exercise it and sell your share for the guaranteed price of 18 .30.

Your payoff is floored, it cannot go below that exercise price.

That perfectly creates the protected shape.

And the cost of this protection is just the premium you paid for the put.

Exactly.

Now for the really mind -bending part,

strategy two.

We're gonna create the exact same payoff with totally different ingredients.

This one is a combination of two things.

You invest the present value of the exercise price in a safe bank deposit, so you're lending money, and you buy a call option.

A faux protective put, as the book calls it.

Right, let's trace the payoff here.

That bank deposit is your floor.

It guarantees you will have $18 .30 at maturity no matter what.

Okay, that's the safe part.

Now what happens if the stock price, S, falls below 18 .30?

Your call option is worthless, but you still have your 18 .30 from the bank, your payoff is 18 .30.

Same as strategy one.

Now what if S rises above 18 .30?

Your call is now worth something, it's worth S minus 18 .30.

So you have your 18 .30 from the bank plus the value of the call.

So 18 .30 plus S minus 18 .30, the 18 .30s cancel out, the payoff is just S.

The payoff is S.

It is mathematically identical to strategy one.

This is the heart of the alchemy.

We just proved that owning a share plus a put is exactly the same as owning a call plus a safe bank deposit.

And because those two strategies have the exact same payoff in the future, the law of one price says they have to have the exact same price today.

And that is the foundation of put -call parity.

This is one of the most fundamental, just elegant relationships in all of finance.

Let's state the formula that comes out of this.

The value of the put plus the value of the stock.

P plus.

Must equal the value of the call plus the present value of the exercise price.

C plus PV of EX.

P plus S equals C plus PV of EX.

That's it.

The cost of strategy one has to equal the cost of strategy two.

Let's talk about that PV of EX for a second.

That's the amount of money you need to put in the bank today so it grows to exactly the exercise price at maturity.

And we have to use the risk -free rate for that, right?

Absolutely crucial.

It'd have to be the risk -free rate like from a T -bill because that part of the payoff is guaranteed.

If you used a risky rate, the whole equivalence would just fall apart.

And we should remember the caveats.

This holds perfectly for European options.

It gets a little messy with American options because of early exercise.

And you have to adjust it if the stock pays a dividend because the call holder doesn't get the dividend but the stock holder does.

But the power of this formula is that we can rearrange it to create things.

If puts aren't available for some stock, we can create a homemade put.

Exactly, you just rearrange the formula to solve for P.

The put equals the call plus the PV of the exercise price minus the stock.

P equals C plus PV of EX minus S.

So you can synthetically create a put by buying a call, lending some money and short -selling the stock.

And this leads right to the idea of an arbitrage check.

If the market price of a real put ever gets out of line with the price of a homemade put, someone can make a risk -free profit and they will very quickly.

Let's walk through that Amazon example.

The stock price, S, was $18 .30.

The call, C, was $1 .46.

The six -month risk -free rate was 2%, so the PV of EX was about $17 .94.

Right, so you plug those numbers in to calculate the price of the homemade put.

$1 .46 plus $17 .94 minus $18 .30.

It comes out to about $110.

$110 .32.

That is what the put should cost.

Now, what if you look at the market and the actual put is trading for only $100?

It's too cheap, there's a free lunch.

There is.

An arbitrager would immediately buy the underpriced real put for $100 and sell the overpriced synthetic put for $110.

And to sell the synthetic put, they just do the opposite of its components.

They sell the call, borrow the money, and buy the stock.

And when all the dust settles at maturity, all the positions cancel each other out perfectly no matter what the stock price does, and the arbitrager has locked in that $10 .32 difference instantly and with zero risk.

And it's that activity that forces the prices back into line.

It's the engine of market efficiency.

Which brings us to the ultimate expression of this, financial engineering.

Right, the idea that you can build literally any payoff structure you want.

Yes, the trick is to spot the option structure when it isn't obvious.

Let's go back to Mrs.

Higdon's bonus at the tech company.

Okay, so her bonus is $50 ,000 for every dollar.

The stock price goes above $120, but it's capped at a total bonus of $2 million.

We have to deconstruct that payoff.

The bonus starts at $120, so that's our first strike price.

The $2 million cap means the bonus stops growing once the stock has risen $40 above $120.

Because $2 million divided by $50 ,000 is $40, so the cap kicks in at a stock price of $160.

Exactly, so the payoff diagram is flat, then it slopes up from $120 to $160, and then it goes flat again.

We need to build that shape.

How do we do it?

With a combination of buying one call and selling another.

Okay, step one, to get that upward slope starting at $120.

We need to buy a call with a strike price of $120.

That gives us the upward sloping part of the payoff we need.

But that would go up forever.

We need to stop it at $160.

So step two, to create that flat ceiling, we have to sell a call with a strike price of $160.

Ah, so once the stock price goes above $160, the call you bought is still making you money.

But the call you sold starts losing you money at the exact same rate.

The loss on the short call perfectly cancels out the gain on the long call.

Creating the flat top, that's brilliant.

And it proves the general theorem here.

Any set of contingent payoffs, any payoff that depends on the value of something else can be built with a mix of simple options and maybe some borrowing or lending.

That's financial engineering in a nutshell.

So we figured out how options work at the end and how they combine.

Now we get to the core valuation question.

What determines the price of a call option before it matures?

Right, before we get into the five specific factors, we have to set the boundaries.

The absolute limits on the price, which you can see in figure 21 .9.

Okay, first, the lower bound.

The option has to be worth at least what you'd get if you exercised it right now.

It has to be worth at least its intrinsic value, max of S minus EX or zero.

If it's sold for less than that, you'd have an instant arbitrage.

Walk me through that.

Say the stock is at 196, the exercise price is 183.

The intrinsic value is $13.

What if the call is selling for only $3?

An arbitrager would instantly buy the call for three, exercise it for 183 for a total cost of 186.

And immediately sell the stock they just got for 196.

Pocketing a risk -free $10,

that kind of pressure would force the option price up to at least $13 in a heartbeat.

So the lower bound is a hard floor.

What about the upper bound?

That's simpler.

A call option can never be worth more than the stock itself.

Why would you pay more for the right to buy the stock than for the stock itself?

You wouldn't, you'd just buy the stock.

The option is always the cheaper alternative, never the more expensive one.

So the true option price has to live in that shaded area between the stock price on top and the intrinsic value on the bottom.

And we need to figure out what drives its value within that range.

Let's start with the two we already know from the Amazon example.

A share price S and the exercise price EX.

Okay, so principle one,

the value of a call goes up as the share price goes up.

And it goes down as the exercise price goes up.

Super intuitive, but fundamental.

The higher S is, the more likely the option finishes in the money.

Now let's talk about the interest rate and time.

They kind of work together.

They do.

Think about an option that is deep in the money.

The stock price is so high that you're almost certain to exercise it.

Okay.

At that point, owning the call is almost the same as owning the stock, but with one huge advantage.

You don't have to pay the exercise price until later.

So you're getting the stock's performance, but delaying the payment.

You are effectively getting an interest -free loan of the exercise price until maturity.

Ah, which leads us straight to principle two.

The value of an option increases with both the rate of interest and the time to maturity.

If interest rates go up, that free loan you're getting is more valuable.

And the longer the time to maturity, the longer you get that free loan for.

Both make the option worth more.

Okay, now we get to the big one.

The one that feels backward to a lot of people.

Volatility, sigma.

Yes.

This is where the normal rules of finance seem to break.

We always teach that higher risk means lower present value.

Right, you demand higher returns.

You pay less for it today.

But for options, it's the opposite.

Higher volatility increases the value of the option.

Okay, I need the deep explanation here because that is really counterintuitive.

If the stock is bouncing all over the place, isn't there a huge risk it could crash?

Shouldn't that make the option cheaper?

The key is that asymmetric payoff, the hockey stick.

The holder benefits from every dollar of a huge upward move, but their loss from a huge downward move is capped at zero.

Right, if the stock goes up by $500, you make a fortune.

If it falls by $500.

You lose exactly the same amount as if it had fallen by $10, nothing.

You just lose the premium you paid.

So volatility increases the chance of an extremely good outcome, but it doesn't change the worst case outcome at all.

Precisely.

It increases the magnitude of your potential winnings while having no effect on your maximum loss.

So higher volatility always makes the expected payoff higher.

This is principle three then.

The value of a call option increases with the volatility of the share price.

And the book's example with stocks X and Y makes this crystal clear.

Both stocks are at 100, strike price is 100.

Stock X is stable.

50 -50 chance it goes to 130 or 90.

Stock Y is volatile.

50 -50 chance it goes to 150 or 70.

In both cases, the worst outcome for the call option is a payoff of zero.

But for stock Y, the best outcome is a payoff of $50 versus only 30 for stock X.

The option on the more volatile stock is clearly worth more.

And this effect gets magnified over time.

It does.

The value depends on cumulative variability.

The more time there is, the more chances that volatility has to create one of those huge profitable price swings.

This has huge real -world implications, especially for executive pay, right?

Back to our plop quiz.

Absolutely.

If you're a CEO and you get to pick between two stock option packages and one company is a stable utility and the other is a high -risk tech startup.

The options on the tech startup are inherently more valuable even if everything else is the same, just because of the higher volatility.

Which, you know, creates some interesting incentives.

The executive is now rewarded for taking on more risk for increasing the stock's volatility because that makes their personal options package worth more.

That was a really powerful walkthrough.

So we have our five determinants of call option value all laid out in table 21 .2.

Let's just run through them one last time.

The one, share price, positive effect.

Two, exercise price, negative effect.

Three, interest rate, positive effect because of that implicit loan.

Four, time to expiration, positive.

More time is more opportunity.

And five, volatility, the big one, positive effect because of the asymmetric payoff.

And we always have to remember those hard boundaries.

The price is always less than the stock but always more than its immediate exercise value.

And this whole framework, these five drivers, they are the foundation for the famous option pricing models like black skulls.

If you understand these five inputs, you understand what's driving the price of any derivative.

This has been an absolutely crucial deep dive.

We started with all these different corporate decisions.

Hedging cocoa, executive bonuses.

And we found they all rest on this one common foundation, the simple concept of the option.

And we covered three main principles today that you, the learner, really need to take away.

First, we define the instruments.

Calls and puts give you a right, not an obligation, which creates that unique hockey stick payoff.

Second, we saw the financial alchemy of put call parity.

That formula, P plus S equals C plus PV of EX, proves that all these different pieces are interchangeable.

You can engineer any custom payoff you want.

And third, we nailed the five value drivers.

We learned the standard ones but we really internalized that counterintuitive rule.

Option value goes up with volatility.

And knowing this, you can now look at almost any big corporate decision.

A capital project, a new security, a compensation plan, and you can spot the hidden options inside.

You can analyze them with so much more nuance.

So to leave you with a final thought to chew on, let's go back to that beautiful parity equation.

P plus S equals C plus PV of EX.

We proved that both sides have the same risky payoff.

But what if you wanted to do the opposite?

What if you wanted to use these building blocks to create a payoff that was perfectly flat?

A payoff that had no risk, that guaranteed no gain and no loss no matter what the stock price did.

How would you combine stock calls and puts to perfectly replicate a risk -free bond?

Think about how you'd rearrange that parity equation.

What would you need to buy and what would you need to sell to make all the stock price risk just cancel out, leaving you with only that guaranteed risk -free return.

Think on that problem of financial risk neutralization and we'll catch you on the next Deep Dive.

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