Call Option at a strike of 20, 22.5, and 25 have prices 3.77, 2.48 and 1.57,...

Call Option at a strike of 20, 22.5, and 25 have prices 3.77, 2.48 and 1.57, respectively. A Butterfly spread strategy has been formulated. At a stock price of 21.5, net Profit/Loss will be ..........while at stock price of 28, profit/loss will be...........

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Expert Solution

in given question butterfly spread is formulated

butterfly spread means

1) buy one call at higher strike price (X₁) =25

2)buy one call at higher strike price (X₂)= 20

3) selling two call at (X₁+X₂)/2=(25+20)/2=22.5

S=SPOT PRICE

X=STRIKE PRICE

CALL BUYER WILL EXERCISE CALL IF S>X OR CALL WILL LAPSE

IN CASE OF CALL SELLING WE HAVE TO THINK FROM BUY SIDE, WHEATER BUYER WILL EXERCISE CALL OR NOT.

if you like my work give me thumps, thanks for giving this oppourtunity

jeff jeffy answered 1 year ago

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