Question

# Call options are available with strike prices of \$15, \$17 ½ and \$20 at prices of...

Call options are available with strike prices of \$15, \$17 ½ and \$20 at prices of \$4, \$2, and \$0.5. Consider a butterfly spread.

A. What are the breakeven stock prices for this trade?

B.   What are the stock prices that make this a profitable trade?

 Strike Price 15 17.5 20 Call Price 4 2 0.5

Buy one \$15 strike call option (Pay \$4)

Sell two \$17.5 strike call option (Receive 2 * 2 = \$4)

Buy one \$20 strike call option (Pay \$0.5)

Net premium paid = 4 - 4 + 0.5 = \$0.5

A. The upper breakeven price = Upper strike - Net premium paid

The upper breakeven price = 20 - 0.5 = \$19.5

The lower breakeven price = Lower strike + Net premium paid

The lower breakeven price = 15 + 0.5 = \$15.5

B. The stock prices that make this a profitable trade are any price above \$15.5 and below \$19.5

Example: \$16, \$16.5, \$17, \$19.45

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