Ideal expiry price for a 35/37.5/40 butterfly
Question
You go long a butterfly built from options struck at and (the wings) and (the body). At expiry, what stock price would you most like to see?
Short answer
. A long butterfly is long one option at each wing and short two at the body, so its payoff is a tent that is zero outside and peaks at the middle strike.
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Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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