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
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 .
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