Do you take advantage of mispriced options?

In answering a question about straddles and strangles, MNSL quoted the following numbers by way of example: stock price and strike prices all $15, time to expiry one month, cost of call option $2, cost of put option $1. The numbers served the purpose of answering the question.

However, what if you actually see these prices quoted? Clearly, there is some mispricing. Using the calculator at http://www.futuresandforex.info/strategies1.shtml I see that the call price of $2 has an implied volatility of 115%, at which the put price should be $1.95; and the put price of $1 has an implied volatility of 61%, at which the call price should be $1.08.

Would you take advantage of this mispricing by buying the put and selling the call and going long the stock? Then, no matter where the marked is after one month, you will make $100 per position of 100 shares. Test three market scenarios: (i) unchanged, (ii) at $10, (iii) at $20. In each case, the outcome is $1 profit.

Answers

CUWu answered a question in Options.
957 points

CUWu answered one year ago …

I think MNSL was using those price points to illustrate a point..in a highly liquid options market you're not likely to see price discrepancies/arbitrage opportunities like that. Obviously if there was one, TAKE IT! But if we're talking about large, publicly traded stocks with liquid derivatives trading around it, you'll be lucky to find something like that.

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MaverickInvestor answered a question in Options.
265 points

MaverickInvestor answered one year ago …

I'm sure someone somewhere is clever enough to write a program that constantly trawls live option data and, as soon as it comes across an anomaly that fits the pre-defined criteria, it whacks on a trade for you.

How nice would that be? I know it's possible, because I know guys who have done something similar with Betfair.

In fact, that's got me thinking...

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ChaosNantuko answered a question in Options.
2183 points

ChaosNantuko answered one year ago …

This would be a form of arbitrage, and arbitrage can only really effectively be executed by large institutions who have computers that "trawl live option data". Even then, the margin on arbitrage is frequently less then 1% making it only really profitable for institutions, and the opportunities are usually only there for a couple seconds. This is one case where only the big investors have access to a form of investment.
That being said... if i saw one of these opportunities, with a decent return AFTER commissions, then i would take it

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