Question

Other things being equal, the call premium should be larger than the put premium in theory, whereas the reverse is true in practice. Explain why for both theory and practice.

Answer 1

Theoritical explanation

Theoretically, there is no upside limitation to the stock price. So, a call option buyer can make unlimited profits. But, the profit to a put option buyer is limited because the stock price cannot go below $0. Therefore, the call option premium > the put option premium in theory.

Practical explanation

Practically, the put option premium is greater than the call option premium because, when the stock price goes down it can go down quickly because of the fear. But, when the call price goes up it goes up slowly. So, the put option makes money quickly, but the call option takes some time to make money.

There is a saying when the stock price goes down it takes elevator, but when it goes up it takes stairs.