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A stock is trading at $40. There are 3 three-month European calls on the stock with strikes of 35, 40 and 45. The prices of
A stock is trading at $40. There are 3 three-month European calls on the stock with strikes of 35, 40 and 45. The prices of these calls are, respectively, 5.50, 3.85, and 1.50. Consider pursuing the butterfly spread strategy (buy the low and the high strike call and write 2 intermediate strike calls) and find the break-even points of the strategy as well as maximum losses and maximum gains. Any issues -comments? What is happening here?
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