Question
You are considering a Butterfly strategy in which you believe the underlying stock price will stay at $60 for a certain period of time. You
You are considering a Butterfly strategy in which you believe the underlying stock price will stay at $60 for a certain period of time.
You have the following call options available to you: Strike Prices of $50, $60 and $70 with each option priced at $22, $15 and $10 respectively
You have the following put options available to you: Strike Prices of $50, $60 and $70 with each option priced at $11.50, $14.40 and $19.30 respectively
All options are European with 1 year to maturity. The risk free rate is 1% (continuous compounding).
Given these three methods to construct a Butterfly, explain why you would choose one method over the other.
Pick a call and a put option with the same strike price. Compare these prices using put-call parity. Do these prices make sense? Please show your calculations.
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