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January 24th, 2013, 02:43 PM   #1
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problem of options, help me!!

i have a problem of options and i have no idea, please help me, is this:
C(K) is the price of a European vanilla call option
with the execution (strike) price K. It is known
that C(80) = 10, C(110) = 8, C(120) = 7.
Does it exist here an arbitrage possibility?
If yes, then propose a strategy and draw
the relevant payoff profile.

thank u!
laurita is offline  
 
January 24th, 2013, 06:10 PM   #2
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Re: problem of options, help me!!

i will not buy vanilla, anymore....
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January 25th, 2013, 01:06 AM   #3
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Re: problem of options, help me!!

can you explain me this, please?
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September 9th, 2013, 07:45 AM   #4
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Re: problem of options, help me!!

Yes there is:
Buy 1 call80 for USD 10
Sell 3 call110 for USD 24
Buy 2 Call120 for USD 14 +
========================
-10+24-14=0 investment

Payoff:
Below 80 = 0
Between 80 and 110 ==> 1 point per point with max profit 30 when expiration on 110 (1 call80 and call100 and call120 worthless)
Between 110 and 120 the profit of 30 will reduce with 2 points each point (3 calls110 short and 1 call80 long) where at 120 your earlier profit of 30 is reduced to 10
Above 120 you fix your profit at 10 by selling 2 Calls120

So free potential profit ===> any size
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