How high will Microsoft fly? Message Board

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Technology Stocks : How high will Microsoft fly?

MSFT 478.29

-1.8%

Nov 20 3:59 PM EST

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To: Jill who wrote (29482)	9/15/1999 6:24:00 PM
From: taxman	Read Replies (1) of 74651

i stated that arbitrage can take advantage of any disparity if implied volatility on puts exceeds that on the calls and vice versa. to illustrate, assume microsoft was at 95 and the implied volatility on january 2000 options was 37. the call would be worth approximately 9 and the put worth 7.5. if the put were to trade out a line at, say, 6, one could go long the put at 6, short the call at 9 and buy 100 shares. if stock closes higher at expiration, say 110; stock sold at 95 by exercise of call 0.00 int cost to hold stock (1.50) call premium received 9.00 put premium paid (6.00) gain or (loss) 1.50 if stock closes unchanged at expiration, say 95; stock sold at 95 by exercise of put 0.00 int cost to hold stock (1.50) call premium received 9.00 put premium paid (6.00) gain or (loss) 1.50 if stock closes lower at expiration, say 80; stock sold at 95 by exercise of put 0.00 int cost to hold stock (1.50) call premium received 9.00 put premium paid (6.00) gain or ( loss) 1.50 traders continuously making this riskless trade would increase put price and/or decrease call price. hope this helps. any questions? regards

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