let’s see if i am the only one. consider a share ABC stock with current price of 50. Which of the following options on ABC stock will most likely have the lowest vega? A long: A. Put with strike of 10 B. Call with strike of 90 C. Put with the strike of 50 and short call with strike of 50. I am sure most of you will get it right. I post answer after 5 responses.

C.?

of course the call the with strike price of 90.

It’s C. If there is no arbitrage, vega for the same strike must be equivalent. So, C has zero vega.

C

answer is C

ohai Wrote: ------------------------------------------------------- > It’s C. If there is no arbitrage, vega for the > same strike must be equivalent. So, C has zero > vega. How do you know there is no arbitrage based off of what is given in the question?

C Wouldn’t the volatility inputs be relatively similar for a put and call that are $40 out of the money in each direction? By process of elimination I arrived at C although I couldn’t really justify C as my answer.

they might be relatively similar but it won’t cancel out to exactly 0?

the long and short position cancel to exactly 0 vega

Chuckrox8 Wrote: ------------------------------------------------------- > C > > Wouldn’t the volatility inputs be relatively > similar for a put and call that are $40 out of the > money in each direction? By process of > elimination I arrived at C although I couldn’t > really justify C as my answer. your are right, A and B have equally low vega

thegooddocta Wrote: ------------------------------------------------------- > ohai Wrote: > -------------------------------------------------- > ----- > > It’s C. If there is no arbitrage, vega for the > > same strike must be equivalent. So, C has zero > > vega. > > > How do you know there is no arbitrage based off of > what is given in the question? Use common sense to predict what the question wants. Rational pricing is a good common sense assumption in most cases.