What can you deduce from this example about option pricing

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Shows call options on Alphabet stock with the same exercise date in June 2016 and with exercise prices $700, $750, $800. Notice that the price of the middle call option (with exercise price $750) is less than halfway between the prices of the other two calls (with exercise prices $700 and $800). Suppose that this were not the case. For example, suppose that the price of the middle call were average of the prices 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 June may be positive but cannot be negative, despite the fact that your net outlay today would be zero. What can you deduce from this example about option pricing?

Reference no: EM131995777

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