Question

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Three call options have the same expiration date and strike prices of $13.00, $17.00, and $21.00....

Three call options have the same expiration date and strike prices of $13.00, $17.00, and $21.00.

a. Explain how to create a butterfly spread from the above options. Clearly indicate which options should be bought, which ones should be sold, and in what quantities.

b. Calculate payoff of the spread for the underlying asset prices of $11.00, $15.00, and $18.00

Solutions

Expert Solution

a.

A Call butterfly spread is an option strategy which is created by Buying one Call lower strike price, Selling two Call with higher strike price and Buying one Call with even higher strike price.

For given case, a call butterfly spread created by:

  • Buy 1 Call with strike price of $13.00
  • Sell 2 Call with strike price of $17.00
  • Buy 1 Call with strike price of $21.00

b.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

  

jeff jeffy answered 1 year ago
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