Question

Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. What is the profit of a butterfly strategy if S=57 and S=67 respectively.

A. 1 and -1

B. -1 and -1

C. 1 and 1

D. -1 and 1

Answer 1

Answer = A) 1 and -1

Explanation:

A butterfly spread is created by buying the $55 put, buying the $65 put and selling two of the $60 puts. This costs 3+8 -. 2×5 =$1 initially.the following table shows the profit and loss from strategy.

Stock price	payoff	profit
ST >= 65	0	-1
60<=ST<65	65-ST	64- ST
55<=ST<60	ST -55	ST - 56
ST <55	0	-1

The butterfly spread will lead to a loss when the final stock price is greater than $64 or less $56