Question

15. A butterfly spread involves writing two call options at one striking price, buying one call option at a lower striking price, and buying one call option at a higher striking price. Suppose you did this by buying 1 of JUN 30 calls ($2.25 each), selling 2 of JUN 35 calls ($1.25), and buying 1 of JUN 40 calls ($ 0.5). How much would be your profits, if, at expiration, the price of a share of the stock is $30, $35, and $40 respectively?

a.   -$2.25, $2.5, $1

2. -$0.25, $4.75, -$0.25
3. $0.25, $5.25, $0.25
4. $1.25, $2.25, $1

Answer 1

Correct answer: b. -$0.25, $4.75, -$0.25

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

B nm two 1 Long Call Jun 30 2 Short Call Jun 35 1 Long Call Jun 40 с Strike Price $30.00 $35.00 $40.00 D Premium $2.25 $1.25 $0.50 | Stock Price on expiration $20.00 $35.00 $40.00 Profit on Strategy $0.25 $4.75 -$0.25

Cell reference -

в Strike Price Premium 30 1 Long Call Jun 30 2 Short Call Jun 35 1 Long Call Jun 40 2.25 1.25 0.5 40 Stock Price on expiration 20 Profit on Strategy =MAX(B7-$C$2,0)+MAX(B7-$C$4,0)-2*MAX(B7-$C$3,0)+2*$D$3-$D$2-$D$4 =MAX(B8-$C$2,0)+MAX(B8-$C$4,0)-2*MAX(B8-$C$3,0)+2*$D$3-$D$2-$D$4 =MAX(B9-$C$2,0)+MAX(B9-$C$4,0)-2*MAX(B9-$C$3,0)+2*$D$3-$D$2-$D$4 35 40 11

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.