Can you suggest a simple strategy that combines an option position and a position in the underlying asset…?
October 30th, 2010
You have been following three-month call options on XYZ bank. You are not sure if is fair price for the stock but you estimate that true volatility is 30%, lower than the 36% implied by the price of three-month call options with strike. Assume the risk-free rate is 3%.
Can you suggest a simple strategy that combines an option position and a position in the underlying asset to exploit this knowledge? Would a delta-neutral trading strategy make sense?
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