A stock price is currently $23.A reverse (i.e short)butterfly spread is created from options with strike prices of $20,$25,and $30.Which of the following is true?
A) The gain when the stock price is greater than $30 is less than the gain when the stock price is less than $20
B) The gain when the stock price is greater than $30 is greater than the gain when the stock price is less than $20
C) The gain when the stock price is greater than $30 is the same as the gain when the stock price is less than $20
D) It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20

Question

Quizplus · Accepted Answer

The gain from a very high stock price or a very low stock price is the same.Suppose calls are used.In the case of a very low stock price none are exercised and the gain is c₁+c₃−2c₂ from the option premium.In the case of a very high stock price all options are exercised.The net payoff is zero and the gain is the same.

A Stock Price Is Currently $23