How do you trade to take advantage of the change in skew

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Suppose the following data are given. The current price of XYZ stock is $38/share. XYZ does not pay a dividend. The (annualized) six-month interest rate is 4%. There are six-month call and put options on XYZ stock. The price of a call option with a strike of $42 is $0.54. The price of a put option with a strike of $35 is $1.11. Suppose you believe that the implied volatility of both options will be .20 tomorrow. How do you trade to take advantage of the change in skew?

Reference no: EM13732298

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