The effects of taxation on put‐call parity

Abstract

Share and option transactions are taxed differently, which means that the after-tax cash flows used to establish put-call parity will differ depending on which option is exercised. This paper derives the after-tax put-call parity relationship for European and American options with or without dividends. Using Australian data for the period July 1999 to June 2002, the after-tax put-call parity relationship explains 88.3 per cent of no-tax lower boundary violations and 78.8 per cent of no-tax upper boundary violations. The violation are larger for more thinly traded securities, providing some evidence that traders are able to profit from the tax discontinuities that affect investors in options. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

Extracting implied dividends from options prices: Some applications to the Italian derivatives market

“…Put-call parity violations are due to various reasons, among which we mention the fact that we do not take into account taxation (see e.g. [1] for a study on the Australian market). The more variability of the dividend in the second approach can be explained as follows: when a model with constant volatility is considered, we have a sort of smile effect for the dividend.…”

Effects of taxation for option writers: an Australian perspective

“…The decision to exercise early depends on the amount of the dividend, the strike price and time until maturity of the option. It also depends on the investor's expectation of the dividend drop‐off and the taxation status of the option holder (see Alpert, 2004, for a discussion of the effects of taxation on the early exercise decision for call options). For put options the early exercise decision is different.…”

Rational early exercise of call options: Australian evidence

“…1 1 Related work considers tax effects on option writers (Alpert and Knight, 2007) and tax effects on put‐call parity (Alpert, 2009). …”