Arbitrage…is this right? If current call is overpriced --> SELL call/BUY stock If current put is overpriced --> SELL put/SELL stock And to know how many options you buy/sell you need to calculate the Hedge Ratio. The questions in the CFAi books on Swaps are f’n impossible.
if current call is overpriced, sell call buy synthetic call
The hedge ratio tells you the # of stocks to sell per option, not the other way around.
best way to work these is to write down the put-call parity and rearrange around till you isolate the overvalued option .then sell the overvalued option and buy the opposite side of the equation.
good point dyslexic