If a trader creates a Put Butterfly Spread using 3800, 3600 and 3400 strike prices of ASX200 index, which costs 370,

Question

If a trader creates a Put Butterfly Spread using 3800, 3600 and 3400 strike prices of ASX200 index, which costs 370, 280 and 210 respectively, what would be the max gain from this strategy. The value of one index point is $25. Group of answer choices A. Gain of $4500 B. Gain of $200 C. Gain of $4800 D. Gain of $18

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Ans) c. Gain of $4800 Butterfly spread put is constructed by buying put option of higer strike price , selling 2 put option with lower strike price and buying one put option with even lower strike price. Thus Put option with strike price 3800 is to be bought Put option with strike price 3400 is to be bought 2 Put option with strike price 3600 is to be sold Premium paid= Premium paid for purchase of Put option with strike price 3800 + Premium paid for purchase of Put option with strike price 3400 - (2 x Premium received for selling Put option with strike price 3600) = 370 + 210 - (2 x 280) = 370 + 210 - 560 = 20 Total premium paid = 20 x 25 = 500 $ Table showing profit Price as at expiry Profit on Put option with strike price 3800 Loss on 2 Put option sold with strike price 3600 Profit on Put option with strike price 3400 Premium paid Net profit A B C D A+B+C-D 2800 25000 -40000 15000 500 -500 2900 22500 -35000 12500 500 -500 3000 20000 -30000 10000 500 -500 3100 17500 -25000 7500 500 -500 3200 15000 -20000 5000 500 -500 3300 12500 -15000 2500 500 -500 3400 10000 -10000 0 500 -500 3500 7500 -5000 500 2000 3600 5000 0 500 4500 3700 2500 500 2000 3800 0 500 -500 3900 500 -500 4000 500 -500 4100 500 -500 4200 500 -500 Thus maximum profit = $ 4500

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If a trader creates a Put Butterfly Spread using 3800, 3600 and 3400 strike prices of ASX200 index, which costs 370, 280 and 210 respectively, what would be the max gain from this strategy

Expert Solution

Archived Solution

Price as at expiry	Profit on Put option with strike price 3800	Loss on 2 Put option sold with strike price 3600	Profit on Put option with strike price 3400	Premium paid	Net profit
	A	B	C	D	A+B+C-D
2800	25000	-40000	15000	500	-500
2900	22500	-35000	12500	500	-500
3000	20000	-30000	10000	500	-500
3100	17500	-25000	7500	500	-500
3200	15000	-20000	5000	500	-500
3300	12500	-15000	2500	500	-500
3400	10000	-10000	0	500	-500
3500	7500	-5000		500	2000
3600	5000	0		500	4500
3700	2500			500	2000
3800	0			500	-500
3900				500	-500
4000				500	-500
4100				500	-500
4200				500	-500