Break from chs, peet and dna

Discussion in 'Options' started by markg_ny, Oct 11, 2005.

  1. markg_ny


    For those who want a break from chs, peet and dna:

    Dr. Risk is always on the lookout for the fast buck. A reader sent him a question, and Dr. Risk couldn't help finding the inevitable arbitrage opportunity in the numerical example?

    What is the arbitrage opportunity?
    Explain why you might not see such an arbitrage opportunity in the real world.
    Dear Dr. Risk – I have a question relating to options, to be precise long butterfly strategy. How do I determine the maximum loss for a long butterfly strategy, I have heard that it is the cost of the spread, but am unsure as to what that means. To be more precise, say I created a long butterfly position with long put A, short put B, short call B and long call C.

    P r e m i u m
    Case strike call put
    A 17.00 0.32 0.10
    B 17.25 0.18 0.15
    C 17.50 0.10 0.30

  2. Long the call fly and short the put fly at a 4 tick credit, gross of commish of course. Flys are fungible; you're netting to zero exposure at a 4 tick arb-gain.
  3. Synthetic mispricing.

    Spreads would kill it.