The 90-, 100-, and 110-strike calls are trading at $12, $5, $3, respectively. The stock price is at $100. What is the maximum net payoff on a long butterfly spread using these options?
A) $- \$ 5$
B) $\$ 0$
C) $\$ 5$
D) $\$ 10$

Question

Quizplus · Accepted Answer

A long butterfly spread involves buying one in-the-money call (90-strike for $12), selling two at-the-money calls (100-strike for $5 each), and buying one out-of-the-money call (110-strike for $3). The maximum net payoff occurs if the stock price is at the middle strike price at expiration, which is $100 in this case. The net cost to enter the position is $12 (buy 90-strike) - $10 (sell two 100-strike at $5 each) + $3 (buy 110-strike) = $5. Since the stock price is at the middle strike, the 100-strike calls expire worthless, and the maximum profit is the difference between the strikes minus the net cost: $10 (difference between 90 and 100 or 100 and 110) - $5 = $5.

The 90-, 100-, and 110-Strike Calls Are Trading at $12 −$5- \$ 5−$5

The 90-, 100-, and 110-Strike Calls Are Trading at $12 $- \$ 5$