Question

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 loss (after the cost of the options is taken into account)?

Answer 1

The amount of maximum net loss is $100

Step-by-step explanation:

The butterfly spread comprise of buying 100 options with the strike price of $60 and $70 and the selling 200 options with the strike price of $65.

The maximum loss is when the strike price is less than $60 or be greater than $70. The aggregate payoffs from the options will amount to $0.

The cost of setting up the butterfly spread is:

= 11 × 100 + 18 × 100 - 14 × 200

= $100

Therefore,the net loss will be $100