Chapter 06 · Section 6.1
Citicorp Puts
For the Citicorp stock, quoted at 11 7/8, the table below shows the prices for the puts traded on the Chicago Board Options Exchange. You estimate that the underlying has not yet reached its lowest point, but you want to take advantage of the temporary spreads between the prices.
Puts Citicorp
Strike January February April
12.5 1/4 1 1/4 1 3/8
15 2 1/2 3 1/4 3 3/8
17.5 5 1/4 5 1/2 5 3/8
20 7 1/2 7 7/8 8 7/8
Which spread will you execute?
c) Buy Jan 20 / Sell Feb 20
No. Your position corresponds to a sale of time value: 3 months for $ 0.375. You gather that you could buy this time value later on for less money. This is, however, not very likely because the time value Feb-Apr costs $ 1.
a) Buy Apr 12.5 / Sell Feb 12.5
b) Buy Feb 15 / Sell Feb 17.5
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