Question

Assume you have been given $400,000 CAD with access to all listed stocks, bonds, futures, and options worldwide. You can trade in options and futures, in combination with the underlying asset. Assume today is Feb 1, 2020 and you have been given $400,000 CAD fake money to trade until April 20, 2020.

Perform a butterfly spread (either call or put) strategy.

Describe the trade and provide the reason for such trade.

Please provide table and or/ graph.

Answer 1

Solution:

Part A )

Butterfly spread long: In order to create the butterfly spread we have to buy a call option at X1 strike price then sell 2 call option at X2 ( Where X2 > X1) and then agan buy a call option at X3 ( Where X3 >X2).

Part B )
We do butterfly spread when we think that the share price will not move much and we also limit our downside risk. The highest profit is achieved when at the time of expiry the spot price = X2. The maximum loss in this trade will be the net debit amount in creating the strategy.

Part C )

In the given scenario we are buying a call option at 30 strike and 50 strike while selling the $40 strike call options .

Payoff of overall trade = Payoff from 30 call + Paoff from 40 call + Payoff from 50 call

Payoff of overall trade = MAX( Spot -30,0) - 3  + (MIN($40-Spot,0) + 8 ) * 2 + MAX( Spot -50,0) - 14