"Selling ITM strangles = Selling OTM strangles with the same strike price: Why?

Discussion in 'Options' started by OddTrader, Jul 7, 2009.

  1. "Selling ITM strangles is equivalent to selling OTM strangles with the same strike prices": True or Not?

  2. This statement doesn't parse...
  3. It is. The difference is the box-arbitrage.
  4. The action of the market enforces equivalence.

    If they were not equivalent, you could buy the cheap one and sell the expensive one, and get free money at no risk.

    Should such a pricing discrepancy show up, it would quickly disappear as market participants would attempt to do just that, simultaneously bidding up the cheap one and pulling down the expensive one, until they were equivalent again.

    Such discrepancies are called "arbitrage opportunities". They, like small black holes, free quarks, antimatter, etc, only exist for fractions of a second.
  5. To confirm: Atticus has it right.

    The two spreads together make up a box spread, and that box has a fixed value, at any point in time.

  6. Thanks Fellas!
  7. Why not just go to an option chain and compare two real examples of ITM and OTM strangles with the same strike price and your answer of TRUE will be staring you in the face, especially when looking at a risk graph.
  8. I was wondering only a risk graph alone is not good enough.

    In Cohen's Bible book, each strategy has 6 illustrations for Risk Profile, Delta, Gamma, Theta, Vega and Rho.

    Besides, I also would like to know Why the prices behave like that.
  9. Not true, "quark stars"
    #10     Jul 7, 2009