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

Solutions

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

Next > < Previous

Related Solutions

For 3-month 55-strike European options on a stock, you are given: (1) The stock's price follows...

For 3-month 55-strike European options on a stock, you are given: (1) The stock's price follows the Black-Scholes framework. (2) The stock's price is 52. (3) The stock's volatility is 0.5. (5)The stock's continuous dividend rate is 3%. (6) The continuously compounded risk-free interest rate is 7%. Calculate the premiums for call and put options.

The current price of XYZ stock is $50, and two-month European call options with a strike...

The current price of XYZ stock is $50, and two-month European call options with a strike price of $51 currently sell for $10. As a financial analyst at Merrill Lynch, you are considering two trading strategies regarding stocks and options. Strategy A involves buying 100 shares and Strategy B includes buying 500 call options. Both strategies involve an investment of $5,000. a. How much is the profit (loss) for strategy A if the stock closes at $65? (sample answer: $100.25...

A call option on a stock with a strike price of $60 costs $8. A put...

A call option on a stock with a strike price of $60 costs $8. A put option on the same stock with the same strike price costs $6. They both expire in 1 year. (a) How can these two options be used to create a straddle? (b) What is the initial investment? (c) Construct a table that shows the payoffs and profits for the straddle when the stock price in 3 months is $50, and $72, respectively. The table should...

Suppose that a March call option on a stock with a strike price of $50 costs...

Suppose that a March call option on a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the option be exercised? Under what circumstances will the holder of the option make a gain? Under what circumstances will the seller of the option make a gain? What is the maximal gain that the seller of the option can make? Under what circumstances will the seller of the option make the maximal gain?

Barrier option For 3 month options on a stock with strike price $50, you are given:...

Barrier option For 3 month options on a stock with strike price $50, you are given: i. The stock's price is $50. ii. The stock pays dividends continuously proportional to its price. The dividend yield is 2%. iii. The continuously compounded risk{free rate of interest is 6%. iv. The price of a European put option is $1.6. v. The price of a down and in call option with barrier $45 and strike price $50 is $0.85. Determine the price of...

The current price of a stock is $40, and two-month European call options with a strike...

The current price of a stock is $40, and two-month European call options with a strike price of $43 currently sell for $5. An investor who feels that the price of the stock will increase is trying to decide between two strategies: buying 100 shares or buying 800 call options (8 contracts). Both strategies involve an investment of $4,000. a. Which strategy will earn more profits if the stock increases to $42? b. How high does the stock price have...

Consider a call option with a strike price of $60 where the underlying stock is currently...

Consider a call option with a strike price of $60 where the underlying stock is currently trading at $67 the continuously compounded risk free rate is 5%, and the standard deviation of the stock returns is 40% per year. The option has 9 months to expiration. Using the Black-Scholes model, what is the value of the call option?

You buy one call and one put with a strike price of $60 for both. The call...

You buy one call and one put with a strike price of $60 for both. The call premium is $5 and the put premium is $6. What is the maximum loss from this strategy? [Using positive number for profit, and negative number for loss]

A call with a strike price of $60 costs $6. A put with the same strike...

A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. For each of the intervals defined by the strike price, show the profit functions associated with forming a straddle (long position), and its graphical representation. For what range of stock prices would the straddle lead to a loss?

A call with a strike price of $60 costs $9. A put with the same strike...

A call with a strike price of $60 costs $9. A put with the same strike price and expiration date costs $3. Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?

Subjects