Question
In: Finance
Create iron butterfly spread in excel, define its legs and draw the graph? ( use put,...
Create iron butterfly spread in excel, define its legs and draw the graph? ( use put, call and/or premium )
Solutions
Expert Solution
An iron butterfly spread is created by :
- Short 1 at-the-money call option
- Short 1 at-the-money put option
- Long 1 out-of-the-money call option
- Long 1 out-of-the-money put option
For example, we take the following spread :
- Short 1 $100 call with premium $3.50
- Short 1 $100 put with premium $3.00
- Long 1 $105 call with premium $2.50
- Long 1 $95 put with premium $1.50
Payoff of a long call option = Max[S-X, 0] - P
Payoff of a short call option = P - Max[0, S-X]
Payoff of a long put option = Max[X-S, 0] - P
Payoff of a short put option = P - Max[0, X-S]
S = underlying price at expiry,
X = strike price
P = premium paid or received (long options involve paying premium, and short options receive premium)
The payoffs of the iron butterfly spread are calculated as below :
The formulas are below :
The graph is below :
The graph is above :
jeff jeffy answered 1 year agoRelated Solutions
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