butterfly.spread {FinancialMath}

Butterfly Spread

Description

Gives a table and graphical representation of the payoff and profit of a long butterfly spread for a range of future stock prices.

Usage

butterfly.spread(S,K1,K2=S,K3,r,t,price1,price2,price3,plot=FALSE)

Arguments

S

spot price at time 0

K1

strike price of the first long call

K2

strike price of the two short calls

K3

strike price of the second long call

r

continuously compounded yearly risk free rate

t

time of expiration (in years)

price1

price of the long call with strike price K1

price2

price of one of the short calls with strike price K2

price3

price of the long call with strike price K3

plot

tells whether or not to plot the payoff and profit

Details

Stock price at time t =S_t

For S_t<=K1: payoff =0

For K1<S_t<=K2: payoff =S_t-K1

For K2<S_t<K3: payoff =2*K2-K1-S_t

For S_t>=K3: payoff =0

profit = payoff+(2*price2 - price1 - price3)*e^{r*t}

Value

A list of two components.

Payoff

A data frame of different payoffs and profits for given stock prices.

Premiums

A matrix of the premiums for the call options and the net cost.

Note

K2 must be equal to S.

K3 and K1 must both be equidistant to K2 and S.

K1 < K2 < K3 must be true.

See Also

butterfly.spread.bls

option.call

Examples

butterfly.spread(S=100,K1=75,K2=100,K3=125,r=.03,t=1,price1=25,price2=10,price3=5)