Question
1. A trader creates a long butterfly spread from options with strike prices of $60, $65, and $70 per share by trading a total of
1. A trader creates a long butterfly spread from options with strike prices of $60, $65, and $70 per share by trading a total of 40 option contracts (10 contracts at $60, 20 contracts at $65 and 10 contracts at $70). Each contract is written on 100 shares of stock. The options are worth $10, $12, and $15 per share of stock.
A. What is the value of the butterfly spread at maturity as a function of the then stock price?
B. What is the profit of the butterfly spread at maturity as a function of the then stock price?
2. A trader creates a long strangle with put options with a strike price of $60 per share, and call options with a strike of $70 per share by trading a total of 20 option contracts (10 put contracts and 10 call contracts). Each contract is written on 100 shares of stock. The put option is worth $9 per share, and the call option is worth $7 per share.
A. What is the value of strangle at maturity as a function of the then stock price?
B. What is the profit of strangle at maturity as a function of the then stock price?
Step by Step Solution
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1 All are as per one contract At a given price we can multiply contract with corresponding strike pr...
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An Introduction to Derivative Securities Financial Markets and Risk Management
Authors: Robert A. Jarrow, Arkadev Chatterjee
1st edition
978-0393912937, 393912930, 393913074, 978-0393920949, 393920941, 978-0393913071
