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If the option price is out of its boundary, what is the arbitrage strategy you would...

If the option price is out of its boundary, what is the arbitrage strategy you would use?

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Answer #1

The most basic strategy I would use and have used would be buying both call and put option at a cheap price which means that the strike price are going to be wide. Why cheap price? Because it is easier for a lower value to touch 0 and maximise your loss from then on. All you would need is good volatility so let's say you buy these two options at $5 each, and good volatility favouring call (it can be put) would reduce the value of the put option to max 0 but increasing the price of call above 10 (break even) and further to unlimited.

  • Low option price
  • High volatility
  • High maturity  

Time these 3 right and you've yourself a great strategy.

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