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What are the arbitrage bounds on the volatility of the price of a binary option? If the binary price moves too much (such that it violates the arbitrage bounds) what trades would you actually execute to capture the related profit?

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  • $\begingroup$ you need to clarify! Let's assume an EU cash-or-nothing call, ie P = E(-rt)*N(d2) in classic BS. The d2 term contains the implied vol on the price of the underlying asset. What's the IV of the binary's price you want to arb; and where does that come from? d-P/d-what is bounded or natural, how? $\endgroup$ – demully Aug 14 at 23:02

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