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Put Options on a stock are available with the following strike prices of $3.5, $4 and $4.5, with the same expiration dates in 3 months. Their prices are $0.2, $0.4 and $0.7, respectively.
Questions:
1) Explain how the options can be used to create a Butterfly Spread. Show the graph with all details (premium, strike price, payoff line, etc). (3%)
2) What is the total cost of creating this combination? (1%)
3) Construct a table showing all possible scenarios how profit varies at the exercise (at the maturity of options) with the following stock prices: $3, $3.7, $4.2 and $5 (2%)
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