I came across a situation like this & wondered whether it can be taken advantage of or make profit. Market was sharply down with a huge gap. Futures was at 5200.00 5200.00 Straddle was at 246.00 5300.00 Starddle was at 244.00 Seems like one is not fair priced. 5300.00 straddle should have been more than 5200.00 straddle. What strategy if any can give a gauanteed profit & under what condition ? Thanks in advance. Scott
A box spread holds together the prices of puts and calls at a pair of strike prices, so if you wanna see whether they are mispriced or not use the box spread rather than the two straddles.
Here's a great site to play around with options strats. I've spent many hours on this site learning how different strats work. http://www.avasaram.com/ It's clunky as hell, but powerful as all get out if you can figure the UI. It's about 70% of the way to being absolutely shockingly incredible. A site made by very intelligent Indians desperately in need of a product manager. As was said, have a look at creating a box spread. Beware, they are also known as alligator spreads because they chomp chomp chomp your profit up on commissions. It's my (possibly mistaken) belief that all simple riskless profit is gobbled up by the arbs with faster computers than you and me have. But certainly opportunity exists to leg into a profit. At any rate, go play around with that site. Before you buy, make damn sure you understand the bid/ask spread on your underlying options.
Don't think there is any arb; you wouldn't expect adjacent straddles to be same value; assume you; - Buy the 5300 straddle for 244 - Sell the 5200 straddle for 246 - Nett credit of 2 Synthetically you are either; - Long x2 the 5200/5300 put spread for 98 debit - Short x2 the 5200/5300 call spread for 102 credit Screenshots attached Cheers James