Sunday, May 18, 2008

Option Abitrage

If you can find an put option at a higher strike price such that the call at this price plus the interest in the short position on the stock up to expiration of the stock is less than the put's extrinsic value then it is a arbitrage opportunity.
 
If the sum of extrinsic values of two out of the money call and put options above and below the current stock should be the same as the sum of two options in the money at the respective prices. Otherwise there is a arbitrage opportunity, if the extrinsic value of the in the money portfolio is greater.
 
A long position is equivalent to a zero strike call or a zero strike put plus a long call.

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Thanking you.
Best regards,
Suminda Sirinath Salpitikorala Dharmasena B.Sc. (Hon.) Comp. & I.S., Lon.

The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honours the servant and has forgotten the gift. - Albert Einstein



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