Chapter 15, Problem 16PS

Summary Introduction

(A)

To represent:

The payoff diagram for the butterfly spread strategy

Introduction:

Spread refers to the difference between rates of interest or two prices. In stock trading, it reflects the difference between the ask price and the bid price associated with the stock.

Summary Introduction

(B)

To represent:

The payoff for the vertical combination strategy

Introduction:

Long strangle is the other name for simply strangle or buy strangle. It denotes neutral strategy with respect to the trading of option which comprises of purchase of slightly out of the money call and slightly out of money put on simultaneous basis having the same date of expiration.