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 mispricing situation. you may want 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 and 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 compared to the 95 and 100 calls, suggesting it may be overpriced. Buying the lower volatility (and potentially underpriced) 95 or 100 call and writing the overpriced 105 call could exploit this mispricing.

You Find the Option Prices for Three June Call Options