Put Arbitrage

If the Put option on the $50 strike is trading at$10, and the put option on the $30 strike is trading$6, is there an arbitrage opportunity?

What if the stock is also available to trade? Does it matter what the stock price currently is?

Note by Calvin Lin
3 years, 4 months ago

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If you can pay 6$to sell the share at 30$, it means that the price of the stock is probably lower than 30. If you can pay 10$to sell the stock at 50$ while its currently trading for less than 30$, there is an opportunity: Buy the stock for less than 30$, buy the put with a strike price of $50 and sell the stock at 50$, the profit will be at least 50-30-10= 10$...right? - 2 years, 10 months ago Log in to reply Not true. Since the$50 put is only worth $10, this means that the intrinsic value is at most$10, and hence the price of the stock is at least $40. If the price was lower then$40, then we could buy the $50 put for$10 and buy the stock, and then on expiration exercise the put and sell the stock for \$50.

Staff - 2 years, 10 months ago