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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 )

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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 ago
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