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Bounding a 33-strike put from a 35-strike put

Question

A stock trades at 3232, and a European put struck at 3535 costs 4.54.5. Using only this information, give the best estimate (the tightest super-replication bound) for the price of a put on the same stock and expiry struck at 3333, to two decimals.

Short answer

About 4.244.24. For a non-negative stock, 3335(35−ST)+=(33−3335ST)+≥(33−ST)+\tfrac{33}{35}(35-S_T)^+=(33-\tfrac{33}{35}S_T)^+\ge(33-S_T)^+, so 3335\tfrac{33}{35} of a 3535 put super-replicates the 3333 put. That bounds its price by 3335×4.5≈4.24\tfrac{33}{35}\times4.5\approx4.24, tighter than the naive bound 4.54.5.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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