Assume That Call Options on Microsoft Stock with the Same

question 102

Essay

Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65.Also assume that the price of the middle call were the average of the other two calls.Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero.What can you deduce from this example about option pricing?
Let X denote the exercise price:

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Definitions:

Pleasure Principle

A psychoanalytic concept where behavior is driven by the desire to seek pleasure and avoid pain, primarily associated with the id aspect of personality.

Repression

A defense mechanism where unwanted thoughts or desires are unconsciously pushed out of conscious awareness.

Defense Mechanism

A defense mechanism is a psychological strategy unconsciously used to protect oneself from anxiety arising from unacceptable thoughts or feelings.

Anxiety-Arousing Thoughts

Internal cognitions or thoughts that trigger or increase feelings of anxiety, fear, or unease.