Question
Suppose that call options on a stock with strike prices $120, $140 and $160 cost $13, $14 and $18, respectively. How can the options be
Suppose that call options on a stock with strike prices $120, $140 and $160 cost $13, $14 and $18, respectively. How can the options be used to create a Butterfly spread?
Call 1 Strike $120: Position Long or short?__________
Call 2 Strike $140: Position Long or short?__________
Call 3 Strike $160: Position Long or short?__________
I. Explain how you can built the spread and write a table that shows the profit and payoff for each option and total spread.
II. When is the Maximum profit? How much?
III. Draw a diagram for the spread showing the total value of the spread and both call options.
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