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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by Sheldon Natenberg

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 15

Option Arbitrage

Suppose that we want to take a short position in an underlying contract that is currently trading at 102.00. We can simply sell the underlying contract at 102.00. However, we have an additional choice—we can take a short position synthetically by selling a call and buying a put with the same expiration date and exercise price. Which of these strategies is best? Suppose that we sell the December 100 call for 5.00 and buy the December 100 put for 3.00, for a total credit of 2.00. If the options are European, with no possibility of early exercise, at expiration, we will always sell the underlying contract at 100.00, either by exercising the put or by being assigned on the call. Because we have a credit of 2.00 from the option ...

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