How to create a butterfly spread

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Reference no: EM132015782

Suppose the price of IBM May 100 call is $5, May 105 call is $2.5 and May 110 call is $1.

a)How to create a butterfly spread?

Buy 1 contract of call options with K1=100 and K3=110, respectively and Sell 2 contracts of call option with K2=105

b)Fill in the missing values for the following Table.

Stock Price Range	Payoff	Profit (the initial cost is1)
S_T=100	0	-1
100<S_T=105	S_T -100	S_T -101
105<S_T=110	110-S_T	109-S_T
S_T>110	0	-1

c)What is the maximum potential profit of your strategy?

400

d) If, at expiration, the price of a share of IBM stock is $102, what would be your profit?

+100

e)What is the maximum loss you could suffer from your strategy?

-100

f) What are break even stock prices?

101 and 109

show me how to get these numbers

Reference no: EM132015782

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