Consider a condor made up of calls at strikes 90, 95, 100, 105, and a butterfly call spread at strikes 90, 97.5, 105. Which of the following statements is valid?
A) A condor is worth less than the butterfly spread irrespective of the level of the stock price.
B) A condor is worth more than the butterfly spread irrespective of the level of the stock price.
C) A condor is worth less than the butterfly spread when the stock price is less than 90.
D) A condor is worth more than the butterfly spread when the stock price is greater than 105.

Question

Quizplus · Accepted Answer

A condor spread involves selling a call (or put) at a lower strike price, buying a call (or put) at an even lower strike price, buying another call (or put) at a higher strike price, and selling a call (or put) at an even higher strike price. The maximum profit occurs if the stock price is between the middle two strikes at expiration. A butterfly spread is similar but typically narrower, involving buying a call (or put) at a lower strike, selling two calls (or puts) at a middle strike, and buying a call (or put) at a higher strike. The maximum profit for a butterfly spread also occurs if the stock price is at the middle strike at expiration. Given the wider range of profitable outcomes for the condor compared to the butterfly, the condor generally has a higher value, as it is less likely to expire worthless.

Consider a Condor Made Up of Calls at Strikes 90