This question is from J. Hall on Vol. Smile.
A European call and put option have the same strike and time to maturity. The call has an implied volatility (IV) of 30% and put has an IV of 25%. What trades would you do?
My answer is: based on the fact the put- call parity requires that both call and put (with the same strike and maturity) should have the same IV, then it mean that call is overpriced (because it is priced with higher IV) and put is under priced (because is under priced)
The strategy will be: long put and short call.
Is this correct?
Thanks,
KC concepts
A European call and put option have the same strike and time to maturity. The call has an implied volatility (IV) of 30% and put has an IV of 25%. What trades would you do?
My answer is: based on the fact the put- call parity requires that both call and put (with the same strike and maturity) should have the same IV, then it mean that call is overpriced (because it is priced with higher IV) and put is under priced (because is under priced)
The strategy will be: long put and short call.
Is this correct?
Thanks,
KC concepts
