"Exploiting Differences in Implied Volatility on the Same Stock"

You observe two put options with the same time to maturity on the same stock that appear to be relatively mispriced. Put A sells for $.75, has a strike price of K = 50, and an implied volatility of 30%. Put B sells for $3.50, has a strike price of K = 45, and an implied volatility from the Black-Scholes-Merton model of 35%. You wish to create a delta-neutral position on these options that will exploit the apparent inconsistency in implied volatilities. Suppose you believe that the Black-Scholes-Merton model is the correct model for valuing options. Which option will you buy? Which will you sell?

"Exploiting Differences in Implied Volatility on the Same Stock" You observe two put options with the same time to maturity on the same stock that appear to be relatively mispriced. Put A sells for $.75, has a strike price of K = 50, and an implied volatility of 30%. Put B sells for $3.50, has a strike price of K = 45, and an implied volatility from the Black-Scholes-Merton model of 35%. You wish to create a delta-neutral position on these options that will exploit the apparent inconsistency in implied volatilities. Suppose you believe that the Black-Scholes- Merton model is the correct model for valuing options. Which option will you buy? Which will you sell? HTML Editora BI U A TXE V TT 12pt Para "Exploiting Differences in Implied Volatility on the Same Stock" You observe two put options with the same time to maturity on the same stock that appear to be relatively mispriced. Put A sells for $.75, has a strike price of K = 50, and an implied volatility of 30%. Put B sells for $3.50, has a strike price of K = 45, and an implied volatility from the Black-Scholes-Merton model of 35%. You wish to create a delta-neutral position on these options that will exploit the apparent inconsistency in implied volatilities. Suppose you believe that the Black-Scholes- Merton model is the correct model for valuing options. Which option will you buy? Which will you sell? HTML Editora BI U A TXE V TT 12pt Para