Question

Demonstrate how a butterfly spread can be constructed using put or call options and discuss the...

Demonstrate how a butterfly spread can be constructed using put or call options and discuss the potential outcomes from this strategy.

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Answer #1

In butterfly spread position, an investor will undertake 4 call option with respect to 3 different strike price. Buying 1 call option at a particular strike price while simultaneously selling 2 call option at higher price and buying 1 other call option at an even higher strike price.

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