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18.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

A.$100

B.$200

C.$300

D.$400

Answer: D

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.

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.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015