Say you observe the premiums of stock call options as follows, Strike Price 50 55 60...

Say you observe the premiums of stock call options as follows,

Strike Price	50	55	60
Option Premium	18	15	11

what would be the arbitrage trading strategy?

A. Long one 50-strike call, short two 55-strike call, long one 60-strike call
B. Long two 50-strike call, short one 55-strike call, long two 60-strike call
C. Short one 50-strike call, short one 55-strike call, long two stocks
D. Short one 50-strike call, long two 55-strike call, short one 60-strike call

Expert Solution

What would be the arbitrage trading strategy?

Long one 50-strike call, short two 55-strike call, long one 60-strike call

As C2>=(18+11)/2

=>C2>=14.50

We must sell overvalued option in this case middle strike option

jeff jeffy answered 2 years ago

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