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?

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Homework Answers

Answer #1
Strike Price 15

17.5

 20
Call Price

4

 2 0.5

Butterfly spread:

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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