Quant Memo
Market Making/●●●●●

Put spread bounds, when higher strike is cheaper

Two put options on the same stock, same expiry: the 8080-strike put is quoted at \6andtheand the90strikeputat-strike put at $4$.

Is there an arbitrage? If so, construct it, and state the model-free bounds a put spread must obey.

Show a hint

A put is the right to sell at the strike. Which strike gives you the more valuable right, and how do the payoffs compare at every expiry price?

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

More Market Making questions