As you extend very deep ITM or OTM the result of microstructure can result in wonky figures. Say you're looking at the 99D/1D call/put combo and the option prices are 80.2/0.2 respectively. Say the put is 0.1 bid at 0.3; mid of 0.2. 0.2 is a vol-figure of 18% and someone comes in and bids 0.28 at 23% vol. Would you sell at 23% vol in that strike looking for the mean reversion? Models are useful for relative value and stressing.
I can see that's wonky. I think I get what you're saying: it's just noise and probably can't be arbitraged in any way. BTW, in this case what is being plotted is actually the last traded price, not the midpoint. Or at least that's what I'm told the 'last' value means.
I'm conclusion with all the nuances surrounding option pricing, would you confidently say there is no " free lunch". At least not any size and or consistency...?
Well I have nearly my entire IRA balance in an arb, but generally no, nobody is going to hand you an edge.
I I always thought an arbitrage was completely risk-free buy from counterparty A sell to B clear product or through exchange
Looks like there was no volume for the call at that strike. Good read. Edit: looks like I spoke too soon. Log volume shows there was volume. Interesting.