Question
Netflix stock is currently trading at $3200. Mr. XYZ expects large volatility in Netflix irrespective of which direction the movement is, upwards or downwards. Mr.
Netflix stock is currently trading at $3200. Mr. XYZ expects large volatility in Netflix irrespective of which direction the movement is, upwards or downwards. Mr. XYZ buys 2 ATM Netflix Call Options with a strike price of $ 3200 at a premium of $ 97.90 each, sells 1 ITM Netflix Call Option with a strike price of $ 3100 at a premium of $ 141.55 and sells 1 OTM Netflix Call Option with a strike price of $ 3300 at a premium of $ 64. Due to the volatility of Netflix stock price, Mr. XYZ plans to adopt a Short Call Butterfly option strategy. The strategy is to buy 2 ATM call options, sell 1 ITM call option, and sell 1 OTM call option.
a. Calculate the strategy payoff to Mr. XYZ.
b. Calculate the breakeven price for this strategy.
c. Draw a payoff chart from this strategy.
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
To calculate the strategy payoff we need to consider the different scenarios based on the stock price at expiration Lets first calculate the total pre...
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Corporate Finance
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
10th edition
978-0077511388, 78034779, 9780077511340, 77511387, 9780078034770, 77511344, 978-0077861759
