Question

With 30 days to expiration, A stock price is $24.50, a call option with a $25 strike is trading at $1.50, and the Put option is trading at $3.00. How would you arb this option series

Answer 1

According to Put call parity theorum,

Assuming the int rate is negligable considering strike price as PV od strike price

Vc + PV of Strike Price = Vp + Share price

1.5 + 25 = 3 + 24.5

There is in equlaity, hence arbitrage exists

Buy a call, Short sale a stock, sell a put option ( 24.5+ 3 -1.5)

= 25.5

Invets the net proceeds

Realize after 30 days

Buy a share using call option if market price > 25 and clear the short position

Buy in open market, if price <= 25 and clear the short position.

In any case Maximum amount can be paid is 25 and book a min profit of $ 0.5 [ 25.50 - 25 ]

..................