Imagine that you are following two stocks in the same industry producing similar products. Their fundamentals such as size and leverage are very similar. However, Stock A has 1 million options outstanding with a combined Gamma of 3 million. Stock B has only 1000 options outstanding with a combined Gamma of 4000. If good news about their industry arrives to the market today, what do you expect to happen on the returns of each of the stocks today and tomorrow? How would you set up an arbitrage strategy by trading Stock A and B?

Answer rating: 100% (QA)

ANSWER Today Stock A is expected to have a higher return than Stock B since its Gamma is much larger ... View the full answer