Three call options on the same asset with the same maturity are available in the market with exercise prices: X1 = $100, X2 = $110, and X3 = $120 respectively.
The three call options are priced at $2, $3 and $7.
(You have to determine which of the three call options cost $2, $3 and $7 respectively)
(a) Show how a butterfly spread option trading strategy can be executed using the above call options.
(b) What market conditions would an investor using a butterfly spread trading strategy be expecting?
(c) Sketch the payoff and profit diagram for the butterfly spread.
(d) Calculate the maximum payoff and maximum profit.
The three call options are priced at $2, $3 and $7.
(You have to determine which of the three call options cost $2, $3 and $7 respectively)
(a) Show how a butterfly spread option trading strategy can be executed using the above call options.
(b) What market conditions would an investor using a butterfly spread trading strategy be expecting?
(c) Sketch the payoff and profit diagram for the butterfly spread.
(d) Calculate the maximum payoff and maximum profit.
