You find the option prices for three June call options on the same stock.The 95 call has an implied volatility of 25%,the 100 call has an implied volatility of 25% and the 105 call has an implied volatility of 30%.If you believe this represents a mis-pricing situation you may wish to ____________________________.
A) buy the 105 call and write the 100 call
B) buy the 105 call and write the 95 call
C) buy either the 95 or the 100 call write the 105 call
D) write the 105 call and write either the 95 or the 100 call

Question

Quizplus · Accepted Answer

The 105 call has a higher implied volatility, suggesting it might be overpriced. Buying the lower volatility calls (95 or 100) and writing the higher volatility call (105) could exploit this potential mispricing.

You Find the Option Prices for Three June Call Options