Timeline for Call option arbitrage opportunity
Current License: CC BY-SA 3.0
13 events
| when toggle format | what | by | license | comment | |
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| Jul 7, 2016 at 11:10 | comment | added | user22469 | Don't forget about dividends, you will be obliged to pay it till you holding short position in stocks. | |
| Apr 26, 2013 at 12:20 | vote | accept | user72180 | ||
| Apr 17, 2013 at 0:45 | answer | added | Rian Rizvi | timeline score: 9 | |
| Apr 15, 2013 at 14:07 | comment | added | Matt Wolf | the arbitrage profit is correct. So what is really your question? When I said "not exactly" I was referring to your terminology "buy back the stock for 18" you used. Maybe I was a bit too picky, but yes the net effect is just that. | |
| Apr 15, 2013 at 13:55 | history | tweeted | twitter.com/#!/StackQuant/status/323796700483428354 | ||
| Apr 15, 2013 at 11:40 | history | edited | Louis Marascio | CC BY-SA 3.0 |
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| Apr 15, 2013 at 11:02 | comment | added | user72180 | Let $S_1 = 20$, i.e. the stock price stays the same, how do you "get back" your investment if you have to return the stock to whoever lent it to you for you to have gone short with it in the first place? At maturity you're left with 18.79, a call option, and an obligation to return stock. You exercise the call option buying 20 worth of stock for 18, you return this stock. You now have 0.79 left. Alternatively, you buy 20 worth of stock for 18, sell it for 20, pocket 2, you now have 20.79 but you must still return stock, you buy it for 20, return it, and you are again left with 0.79, no? | |
| Apr 15, 2013 at 9:13 | comment | added | Matt Wolf | Not exactly: You buy back the stock at whatever price it is traded at, you exercise the call if the stock price is above your strike at expiry and you get back your investment of 17 plus interest. | |
| Apr 15, 2013 at 9:06 | comment | added | user72180 | @Freddy I understand that since $c = 3 < 20 - 18e^{-0.1} = 3.71$ this presents an arbitrage opportunity since by definition a sub-optimal price reflects potential achievable value. Perhaps my original post should have asked how exactly the above quoted arbitrage strategy works. Am I right in saying that if you buy the call and short the stock, you end up with $-3 + 20 = 17$, which you can then invest to get $18.79$ in a year's time; at maturity, you buy the stock for $18$, return it, and pocket $0.79$ instead of getting $-1$, or rather $0$, were you not to engage in arbitrage? | |
| Apr 15, 2013 at 8:00 | comment | added | Matt Wolf | The simplest way to show arbitrage opportunities here is the lower bound of the call price which is call > value of underlying asset - PV of strike which should force the call option price to be above about 3.71. Anything below that presents an arbitrage opportunity. Obviously the OP has made clear that he made a lot of simplifying assumptions. Thus, we are talking about a theoretical arbitrage opportunity absent of any transaction costs, liquidity issues, dividends,... | |
| Apr 15, 2013 at 7:15 | comment | added | cdcaveman | If the stock never moved.. Haha yes.... The risk premium over and above the intrinsic implies a distro of stock returns ... So all joking aside... No. No arb there .. There's risk from hedging, cost of borrowing.. Etc | |
| Apr 15, 2013 at 6:37 | review | First posts | |||
| Apr 15, 2013 at 14:01 | |||||
| Apr 15, 2013 at 6:19 | history | asked | user72180 | CC BY-SA 3.0 |