Kevin: I use Michigan and whatever state Fidelity is in using the MBNA %2 credit card.
No the market is not mis-pricing the options. Two options of the same company, one being a $100 option stike and another being a $105 strike obviously has a $5 difference if both of them expire in the money. At any given time before expiration those options will NOT have a $5 difference in cost simply because of how options are priced. That difference is the spread and depending on how much risk you want to take on, that $5 spread could be $2.50 a month out from expiration and at the time both options could be in-the-money. The spread decreases dramatically if either or both are out-of-the-money. Again, the goal is not to be 100% right, you can have lots of room for error, or you can take on extra risk. I do both. I usually pick up 25% spreads ($4 off a $5 spread, or $2 off a $2.50 spread) but I also put out a few 40+% spreads (Apple this month I took a $115/$120 spread when Apple was trading at $123.50, cost me $3.50. As long as Apple closed at or above $120 on July 20th I would make 42%. Of course Apple exploded and now I'm as safe with my $115/$120 spread as I am with my less risky $110/$115 spread I picked up for $4 early this month). Vertical spreads are a form of hedging. I can explain more if you want, but I hate to bring it into this forum since it really doesn't have to do with any of the native college savings plans.
(edit) oh and CP, I wasn't trying to say that a monkey could win using this strategy, I was simply showing an experiment I performed last year with Crammer's stock picks ... while trying to throw a little humor into it.