Question

The 1-week call options on the Alibaba stock with strike prices of $185, $190, and $195 are $10, $7, and $5.5, respectively. An investor longs a butterfly spread using these three options. Specifically, he longs 100 call options with the strike price $185, shorts 200 call options with the strike price $190, and longs 100 call options with the strike price 195. What is the investor's maximum gain from this strategy? Please provide your answer in unit of dollars

Answer 1

Sl.No.	Partiulars	Longs 100 call options with Strike Price 185$	Shorts 200 call options with Strike Price 190$	Longs 100 call options with Strike Price 195$	Total cash inFlow
a)	Premium	10	7	5.5
b)	Call options	100	200	100
c)	Total premium (paid) / received a*b	-1000	1400	-550	-150
d)	If Stock Price is
	170	-1000	1400	-550	-150	Since price (170) is less in market than strike price (185/190/195), Investor will not exercise call option. But Premium had to be paid
	175	-1000	1400	-550	-150	Since price (170) is less in market than strike price (185/190/195), Investor will not exercise call option. But Premium had to be paid
	185	-1000	1400	-550	-150	Since price (170) is less in market than strike price (185/190/195), Investor will not exercise call option. But Premium had to be paid
	190	-19500	39400	-550	19350	Since price (170) is less in market than strike price (195), he will not exercise call option @ 195$ Exercises = 100*185+1000 = 19500                     = 200*190+1400 = 39400
	195	-19500	39400	-20050	-150	Since price (195) is high in market than strike price (185/190/195), he will exercise call option. Also premium had to be paid Exercies = -100*185-1000=19500                   = 200*190+1400 =39400                   = -100*195-550 = -20050
	200	-19500	39400	-20050	-150	Since price (195) is high in market than strike price (185/190/195), he will exercise call option. Also premium had to be paid Exercies = -100*185-1000=19500                   = 200*190+1400 =39400                   = -100*195-550 = -20050

From the table, it is observed when stock price is equal to strike of shorts call options. Investor can earn upto 19350$ after deducting premium paid/received from call options.