After understanding a clients unique circumstances, you advise them a bull spread is relevant for their needs. Using the June Put Contracts X1 and X2, you have been asked to provide the client the following information (show all workings)

After further understanding the clients financial situation, you believe you need to change your strategy to a long butterfly. Recall: this involves buying 1 put at a low strike price, selling 2 puts at a higher strike price and buying another put at an even higher (highest available) strike price. Using the June Put Contracts X1, X2 and X3, you have been asked to provide the client the following information (show all workings).

What is the cost of undertaking this strategy

What is the breakeven price(s) of this strategy

What will be the profit if the stock price at expiration is $52.50?

What is one advantages that a long butterfly strategy has over a bull spread?

What type of market conditions would best suit a long butterfly strategy (e.g., what would your view of future market conditions be if you were to implement this strategy). Hint: what happens if market volatility is low? What happens if market volatility is high? What happens if prices increase / decrease?

Answer rating: 100% (QA)

Cost of undertaking this strategy To calculate the cost we need to consider the premiums of the put contracts X1 X2 and X3 Assuming the premiums are a... View the full answer