Well, this isn't the trade that you are implying. Maybe get some other ideas.
Sell 400 55Cs @ 2.15
Buy 20,000s for the conversion.
Any edge here depends on the exact price of the UL
No 1.00 edge, just my first impression.
You buy the straddle for 4.15
You buy the 65 call, sell the 65 put for a forward price of 54.95.
you sell the 55 call 2x at 2.15 for a forward price of 55.15 with the straddle.
that’s an arb of 20 cents I think.
I think that's most of the puzzle pieces together here, so let's dissect the position:
1. We buy the 55 straddles for 4.15
2. We sell the 55 calls for 2.15 ->
long 200 55 puts
3. We buy 400 65 calls for 0.05$
4. We sell 200 65 puts at 20.10 - >
long 200 55/65 straddles at 2.05$ AND we're long 20.000 shares synthetically
5. We sell 400 calls at 1.05$
Final position:
200 55/60/65 butterflies
Price:
55 strike: buy straddle at 4.15, sell calls at 2.15. Long 55 puts at 2.00.
65 strike: the combo price is 65 -10.10+0.05 = long 20.000 shares at 54.95$ + long 200 calls at 0.05
-> Long 55 puts at 2.00 + long stock at 54.95: Long calls at 54.95-55+2.00= 1.95
60 strike: well...1.05$^^
So the fly goes for 1.95-2x1.05+0.05= -0.10 meaning we get paid to leg into a butterfly
We can derive vol from the straddle by using the short cut 0.8*Stock*sigma*sqrt(time to expiry in years): 4.20 (asuming taking offers)=0.8*55(derived from the combo)*sigma*sqrt(0.25).
Solved for sigma equals 19%
If you put that number into a n option pricer you get a theo price for the fly of 0.93$ and we got paid 10 cts for it. Our edge is 1.03$
