Butterfly spreads combine the bull and bear spreads and involve three options with different strike prices and
Question:
For example, suppose a stock is selling for $61 and there are three-month call options at $57, $60, and $63. The prices of the options are $6, $3, and $1, respectively.
a) The investor expects the price of the stock to be stable. What would the investor gain or lose at the options' expiration from constructing an appropriate butterfly spread at the following prices of the stock: $50, $55, $57, $60, $63, $65, and $70?
b) What is the maximum possible loss?
c) What is the maximum possible gain?
d) What is the range of stock prices that produces a gain from constructing this butterfly?
e) Did the butterfly achieve its objective based on the expectation that the price of the stock would be stable?
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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