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Answer: 265%
A **long call butterfly spread** is constructed as: - Buy 1 call at strike 16 - Sell 2 calls at strike 20 - Buy 1 call at strike 24 ### Initial cost - Buy $16 call = $5.00 - Sell two $20 calls = 2 × $2.45 = $4.90 received - Buy $24 call = $1.00 Net initial cost: \[ 5.00 + 1.00 - 4.90 = 1.10 \] ### Maximum payoff A long butterfly has maximum payoff at the middle strike, which is $20: \[ 20 - 16 = 4 \] ### Maximum profit \[ 4.00 - 1.10 = 2.90 \] ### ROI \[ ROI = \frac{2.90}{1.10} = 2.636 \approx 263.6\% \] The closest answer choice is **265%**. So the correct answer is **C**.
Author: Manit Arora
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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%
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