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Suppose that we have three European puts with strikes 55, 60, and 65 and the same...

Suppose that we have three European puts with strikes 55, 60, and 65 and the same maturity 1 year. Their prices are 6.75, 9.00, 11.00. Is it possible to do an arbitrage? If so, create the strategy. If not, explain why.

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Answer #1

There is no arbitrage opportunity. A European put option gives the right to sell the stock at the strike price if the market price falls below the strike price at expiration. So, higher the strike price, higher should be the price of a put option, all else being equal.

We can see as the strike price increases from 55 to 65, we see the price of put option also increase from 6.75 to 11.00. Hence, there is no arbitrage opportunity.

Can you please upvote? Thank You :-)

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