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186
1.A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options with strike prices of $20, $25, and $30. Which of the following is true?
A.The gain when the stock price is greater that $30 is less than the gain when the stock price is less than $20
B.The gain when the stock price is greater that $30 is greater than the gain when the stock price is less than $20
C.The gain when the stock price is greater that $30 is the same as the gain when the stock price is less than $20
D.It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20
A.The gain when the stock price is greater that $30 is less than the gain when the stock price is less than $20
B.The gain when the stock price is greater that $30 is greater than the gain when the stock price is less than $20
C.The gain when the stock price is greater that $30 is the same as the gain when the stock price is less than $20
D.It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20
Answer: C
The gain from a very high stock price or a very low stock price is the same. Suppose calls are used. In the case of a very low stock price none are exercised and the gain is c1+c3−2c2 from the option premium. In the case of a very high stock price all options are exercised. The net payoff is zero and the gain is the same.
The gain from a very high stock price or a very low stock price is the same. Suppose calls are used. In the case of a very low stock price none are exercised and the gain is c1+c3−2c2 from the option premium. In the case of a very high stock price all options are exercised. The net payoff is zero and the gain is the same.
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015