A stock is currently trading at a price of 22. You observe the following prices for European call options on the stock (the strikes are in parentheses): $C ( 20 ) = 3.25$ , $C ( 22 ) = 1.95$ , and $C ( 24 ) = 0.40$ . You can conclude from this that
A) The 20-strike call is overvalued.
B) The 24-strike call is undervalued.
C) The prices of the calls are inconsistent with no-arbitrage.
D) The stock is mispriced.

Question

Quizplus · Accepted Answer

The prices of the calls suggest an arbitrage opportunity due to their relative pricing not aligning with the expected increase in option value with a decrease in strike price, indicating inconsistency with no-arbitrage principles.

A Stock Is Currently Trading at a Price of 22 C(20)=3.25C ( 20 ) = 3.25C(20)=3.25

A Stock Is Currently Trading at a Price of 22 $C ( 20 ) = 3.25$