Question

Call Option at a strike of 17.5, 20 and 22.5 have prices 5.47, 3.77 and 2.48, respectively. A Butterfly spread strategy has been formulated. If underlying stock has a price of 22, net profit (loss) will be ____________ while at stock price of 18.5, profit/loss will be ______

Answer 1

Answer :- If underlying stock has a price of 22, net profit (loss) will be 0.09 while at stock price of 18.5, profit/loss will be 0.59

Calculation :

Butterfly spread is when A trader buys two option 1 at a higher strike price and 1 at a lower strike price and sells 2 option contracts at mid strike price.

So he'll buy one option at 17.50

O/f of prem = 5.47

and buy one call at 22.50

O/f of prem = 2.48

& sell two option at 20

I/f of prem = 3.77*2 = 7.54

So there will be net outflow of premium = 5.47 + 2.48 - 7.54

= 0.41

Max Loss = 0.41

Max Gain = 20-17.5 - 0.41

= 2.09

Now if on expiration date stock price will be 18.50, then profit loss will be

C+ @ 17.50	C+ @ 22.50	2C- @ 20	Net O/F of prem.	Net Profit
Exercise, so Profit = 1.00	Lapse	Lapse	0.41	0.59

Now if on expiration date stock price will be 22, then profit loss will be

C+ @ 17.50	C+ @ 22.50	2C- @ 20	Net O/F of prem.	Net Profit
Exercise, so Profit = 4.50	Lapse	Exercise, so loss = 4	0.41	0.09