Q#$1$

Suppose you are expecting the stock price to move substantially over the next three months. You

are considering a butterfly spread. Construct an appropriate butterfly spread using the October $160,$

$165,$ and $170$ calls. Hold the position until expiration. Determine the profits and graph the results.

Identify the two breakeven stock prices and the maximum and minimum profits. Note that each

option is written on $100$ underlying!

The stock was priced at $165\mathrm{.}13.$ The expirations are July $17,$ August $21,$ and October $16.$ The

continuously compounded risk$-$free rates associated with the three expirations are $0\mathrm{.}0503,$

$0\mathrm{.}0535,$ and $0\mathrm{.}0571,$ respectively. The standard deviation is $0\mathrm{.}21.$

Strategy Composition:

Profit Equation:

Option Value at Expiration Given Different Stock Prices