Explanation:
A long call butterfly spread is constructed as:
$16 call = $5.00$20 calls = 2 × $2.45 = $4.90 received$24 call = $1.00Net initial cost:
A long butterfly has maximum payoff at the middle strike, which is $20:
The closest answer choice is 265%.
So the correct answer is C.
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Q-184.6. The stock of ACME company is currently trading at $20.00. There are three call options on the stock: an ITM call option with a strike at $16.00 costs $5.00; an ATM call option with a strike at $20.00 costs $2.45; and an OTM call option with a strike at $24.00 costs $1.00. If an investor enters a long call BUTTERFLY SPREAD trade, what is the maximum return on investment (ROI) where ROI = maximum profit / initial cost, without regard to time value of money?
A
93%
B
167%
C
265%
D
233%