Question 3

Using Airbus options data provided in the Excel spreadsheet, construct long butterfly strategies i) with call options, ii) with put options, and iii) with call & put options (iron butterfly), such that your maximum payoff from the strategy peaks for at-the-money (ATM) strike price, while in-the-money (ITM) & out-of-the-money (OTM) strikes for the strategy are chosen with symmetric increments relative to the ATM strike. For example, if you construct a long call butterfly strategy with the ATM strike of 100, your symmetric ITM & OTM call pairs could be {95, 105}, {90, 110}, {85, 105}, etc., but not {95, 102} and so on.

Airbus options data provided in the Excel spreadsheet are based on December options that are traded on Paris Euronext. The current Airbus stock price is € 66.92. You estimate the lowest (highest) possible price of the stock at maturity to be € 60.85 (€ 70.10).

a) Which butterfly strategy gives the highest profit at maturity if the stock price at maturity stays the same?

• Note: indicate the type of the butterfly (call, put, or iron) and the strike prices used for options

b) How much profit do you get from this strategy?

c) Which butterfly strategy gives the highest loss at maturity if the stock price at maturity equals to its lowest estimate?

• Note: indicate the type of the butterfly (call, put, or iron) and the strike prices used for options

d) How much loss (in absolute terms) do you get from this strategy?

e) Which butterfly strategy gives the highest profit at maturity if the stock price at maturity equals to its highest estimate?

• Note: indicate the type of the butterfly (call, put, or iron) and the strike prices used for options

f) How much profit do you get from this strategy?