Problem 11.4.

Call options on a stock are available with strike prices of $15, $17 1/2, and $20 and expiration dates in three months. Their prices are $4, $2, and $1/2 respectively. Explain how the options can be used to create a butterfly spread. Construct a table showing how profit varies with stock price for the butterfly spread.

An investor can create a butterfly spread by buying call options with strike prices of $15 and $20 and selling two call options with strike prices of $17 1/2