Markets: A Rigorous Course

M09 · Problem 10 ★★ Check

Iron condor arithmetic

Nifty future 25,000, r=6%r=6\%, 7-day options, flat vol 13%. The short iron condor 24,300/24,500/25,500/25,700 takes in 37.37 points per unit. (a) Compute max profit and max loss per lot and the two breakevens. (b) Under the pricing measure (lognormal, vol 13%), compute the probability of a profit and the probability of the maximum loss. (c) If Nifty's real-world distribution over the week is lognormal with drift rr and vol 10%, what is the probability of a profit? Is the trade's real-world expectation positive? Explain without further calculation what happens to that answer if the real distribution has the same 10% vol but fat tails.

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Commas, ₹, % and 1e-3 notation are accepted.

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