Question
3. Call options are available with strike prices of $15, $17 and $20 at prices of $4, $2, and $0.5. Consider a butterfly spread. (BUY
3. Call options are available with strike prices of $15, $17 and $20 at prices of $4, $2, and $0.5. Consider a butterfly spread. (BUY X1, SELL 2X2 and BUY X3 where X2=(X1 + X3)/2 & X2 S)
A. What are the breakeven stock prices for this trade?
B. What are the stock prices that make this a profitable trade?
[The correct answer is not 19.50 or 19.00 for the lower bound, it is 15.50]
4.The current price of a stock is $94 & European call options with a strike of $95 currently sell for $4.70. An investor is trying to decide between buying 100 shares of stock and buying 2,000 call options (= 20 option contracts).
A. At what stock price would the investor be indifferent between these 2 trades?
B. At what stock prices would the investor be better off with the option contract purchase?
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