Pear, Inc. is presently trading at $100 per share; at-the-money one-month calls are trading at $5.43, and puts are trading at $5.01; and at-the-money two-month calls are trading at $7.72, and puts are trading at $6.89. At present, these option prices reflect a Black-Scholes-Merton implied volatility of 45 percent for all options. You believe, however, that the volatility over the next month will be lower than 45 percent and the volatility in the second month will be higher than 45 percent because you think Pear, Inc. will publicly schedule an earnings announcement in 45 days and there will be an information blackout period leading up to the announcement.
A blackout period occurs when a company does not provide any information to the public for a stated period of time. The earnings announcement will cause higher volatility, and the blackout period will result in lower volatility. Design an option strategy using all four options that will profit if you are correct in your volatility belief, the company publicly schedules the announcement within the next few days, and option prices immediately adjust to these beliefs?