OptionArbitrage

OptionArbitrage - Option Arbitrage by Dr. Fernando Diz...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Option Arbitrage by Dr. Fernando Diz Syracuse University
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option Arbitrage Mimicking positions Suppose that a Trader has the following  position: Long one May 100 Call Short one May 100 Put If the options are European, what does the  trader own at expiration?
Background image of page 2
Option Arbitrage Two ways of thinking about it: 1. Payoff of the portfolio at expiration. 2. Delta of the position.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option Arbitrage 1. Payoff of the Long call at expiration?  S-X when S>=X 2. Payoff of the Short put at expiration? -(X-S) = S-X when S<X So the payoff of this position is always S- X! Graph.
Background image of page 4
Option Arbitrage Long Call and Short Put -60 -40 -20 0 20 40 60 Asset Price Call Put Call + Put
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option Arbitrage 2. For simplicity suppose the Stock price is  100. What is the Delta of the call? (Roughly) What is the Delta of the put? (Roughly) What is the Delta of the strategy?
Background image of page 6
Option Arbitrage The delta of an at-the-money call is  roughly 0.5. The delta of an at-the-money put is  roughly -0.5. But remember that the put is  short!! So what is the delta of a short put?  The delta of the strategy is 0.5+0.5 = 1,  the same delta as the underlying!
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option Arbitrage In effect, the trader owns the underlying  asset payoff stream as if he held the  underlying long! This is called a mimicking LONG  underlying. How do we get a mimicking short  underlying?
Background image of page 8
Option Arbitrage Short Call and Long Put -60 -40 -20 0 20 40 60 Asset Price Call Put Call + Put
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option Arbitrage Observations: 1. A Mimicking underlying behaves like  the true underlying. 2. What is the DELTA of the mimicking 
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/09/2010 for the course FIN 459 taught by Professor Yildary during the Spring '07 term at Syracuse.

Page1 / 31

OptionArbitrage - Option Arbitrage by Dr. Fernando Diz...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online