Call Option S=100 K=100 Payoff=1 (option is not available) How can i replicate this (payoff) with calls and puts with strike prices with multiples of 5$
Thanks for help
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use a vertical spread and delta hedge it.
Going back to the original question, there is no static replication. This is clear from the first answer above which states that a call spread with an infitesimal difference between their strikes is needed. To arrive at an approximate replication, we need the probability of the underlying fixing in the USD 5 interval between the calls to be small, hence:
Going towards the strike at limited volatlity and time to expiry, the delta of the binary rises above that of the replica. Adjusting the positions in the options of the replica would probably not liquidity-wise be feasible - hence the second answer: