Butterfly Spread - Reading 37, book 5 , pg419

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maya

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I can not figure out how they calculate the max. profit for butterfly spread using put contracts. In example 7 pg.423 the max. profit is calculated based on the X2 and X1. I think it should be X3-X1- put premiums….
can someone explain it to me? much appreciated…
 
it can never be x3-x1.
it can either be x2 - x1 or x3 - x2.
and it does not matter either ways - because the 3 prices are evenly spaced. look at the graph shape of the profit payoff. the maximum will always be at the mid put (or call) exercise price.
 
thanks a lot
I meant X3-X2 and yes , you are right…I forgot they are evenly spaced..
 
All i can say is I hope to god that the option strategy questions are multiple choice and not essay because I am not wasting my time memorizing more than the calculated profit on each strategy. Plug and chug baby.
My worst nightmare is seeing them ask me in an essay format the breakeven prices for a buttterfly spread. I think i will just draw a picture of a butterfly if this comes up.
 
markCFail,
Others have lived that nightmare. CFAI provides access to previous year essay questions so that we can practive them. That exact example is on the provided version of the 2010 exam.
Be prepared for it. It’s not that tough and you still have plenty of time.
 
Thats just a dick move on their part, what good does memorizing that do?
Anyhow… I’ve taken all the past exams, many times, so I actually do think I remember seeing that though it’s been a while. I have all the payoffs memorized, thats no sweat…. its memorizing the max profit, loss, and breakeven prices for every fkn strategy that is just not worth the time to me. If it’s multiple choice and I know the payoff calc, them i’m golden…. essay is a diff story.
This is one of those things like currency swaps at LII where i just feel like the brain damage and “head space” you use up is not worth the 1-2 questions.
 
I can not figure out how they calculate the max. profit for butterfly spread using put contracts. In example 7 pg.423 the max. profit is calculated based on the X2 and X1. I think it should be X3-X1- put premiums….
can someone explain it to me? much appreciated…
Just remember in long butterfly strategy, max profit occurs where the stock price = short option strike price. this point provides the highest value for butterfly…So adjusted for put premiums you get the highest profit.
 
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