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?
a) Buy Apr 12.5 / Sell Feb 12.5
b) Buy Feb 15 / Sell Feb 17.5
c) Buy Jan 20 / Sell Feb 20
Calculate the spreads between the different premiums paid and compare them with the others. Don't forget to keep in mind your expectations of the market.