Question

Show the profile of the butterfly option strategy for the stock price range $65 - $95 (5):

Buy 100 $72 call @ $6.10

Sell 200 $75 calls @ $4.10

Buy 100 $78 call @ $2.60

Current price is $75.28. On which stock price interval is this strategy profitable? (2)What is the maximum profit/loss of this strategy? (2)When will you engage in this strategy? (1)

Answer 1

Call butterlfy

Buy 100 $72 call @ $6.10

Sell 200 $75 calls @ $4.10

Buy 100 $78 call @ $2.60

Net premium paid = 6.10 - 4.10 * 2 + 2.60 = $0.50

Lower breakeven price = Lower strike + Net premium paid

Lower breakeven price = 72 + 0.50 = $72.50

Upper breakeven price = Upper strike - Net premium paid

Upper breakeven price = 78 - 0.50 = $77.50

This strategy is profitable for the stock range: 72.50 to 77.50

Width of the wings = 75 - 72 or 78 - 75 = $3

The maximum profit = Width of the wings - Net premium paid

The maximum profit = 3 - 0.50 = $2.50

The maximum loss = Net premium paid

The maximum loss = $0.50

We will engage in this strategy when we believe that the stock expires at $75