Question

A trader wishes to construct a butterfly spread in the calls listed below centered about a strike
price of 40, with 90 days to go to expiration. Using the 38, 40 and 42 strikes shown below,
describe how such a position could be set up.. Calculate the dollar profit on 10 such butterfly
spreads assuming that the stock closes at the most profitable price for this strategy.

Current Stock Price 41.5 Volatility 27% 90 days to expiration

90 day calls strike 38 5.28
90 day calls strike 40 3.16
90 day calls strike 42 2.02

Answer 1

Setting short call butterfly spread strategy since the middle option strike price is lower than the current stock price
Butterfly spread uses four option contracts with the same expiration but three different strike prices. The trader buys two option contracts at the middle strike price, sells one option contract at a lower strike price, and another option contract at a higher strike price
Maximum profit if stock closes on market price of 38

Sr no	Days to expiry	Option	strike	Option premium	Current share price	Trade	Cash flow from option premiums	Cash flow from exercising option- market price <=38	Cash flow from exercising option- market price 40	Cash flow from exercising option- market price >=42
1	90	calls	38	5.28	41.5	Sell	5.28	0	-2	-4
2	90	calls	40	3.16	41.5	Buy * 2	-6.32	0	0	4
3	90	calls	42	2.02	41.5	Sell	2.02	0	0	0
						Total	0.98	0	-2	0
						Maximum profit	0.98
						Total profit	9.8