A trader creates a long butterfly spread from options with strike prices $60,$65,and $70 by trading a total of 400 options.The options are worth $11,$14,and $18.What is the maximum net gain (after the cost of the options is taken into account)?
A) $100
B) $200
C) $300
D) $400

Question

Quizplus · Accepted Answer

The butterfly spread involves buying 100 options with strike prices $60 and $70 and selling 200 options with strike price $65.The maximum gain is when the stock price equals the middle strike price,$65.The payoffs from the options are then,$500,0,and 0,respectively.The total payoff is $500.The cost of setting up the butterfly spread is 11×100+18×100−14×200 = $100.The gain is 500−100 or $400.

A Trader Creates a Long Butterfly Spread from Options with Strike