Last question in butterfly spread,
max loss per contract = 70.
they then multiply it by 100. I don;t know why they multiplied it with 100. where is the relavent info for this multiplication?
thanks,
i think it says multiplier $100 in the Exhibit heading…
it does in exhibit 2 for Valentine but not for Chen.
Below is what detail given for Chen.
Kung Chen expects the tracking stock on the SPDR Dow Jones Industrial Average ETF (symbol: DIA) to trade within a narrow range around its current price over the near term. On the basis of this expectation, he believes a profitable trading opportunity is to initiate a butterfly spread strategy using call options on DIA. Osborne suggests using three one-month call options on the DJIA. Chen initiates a butterfly spread using a total of 200 long contracts and 200 short contracts. Exhibit 3 illustrates current DJIA call options expiring in one month.
Exhibit 3
DJIA Call Options Expiring in One Month
The answers are:
Maximum loss per contract = c1 – 2c2 + c3 = [$4.20 – (2 × $2.00) + $0.50] × 100 = $0.70 × 100 = $70
To find the maximum loss at expiration for Chen’s spread strategy, multiply the per contract payoff by 100 , or $70 × 100 = $7,000.
I understand the reason to multiple by 100 contracts. But the maximum loss per contract need to be multiplied by 100? Why?
I think they multiply by 100 because 100 is a lot. The minimum number of options you can purchase. However you know you calculated correctly if you reach some of given solution quotient of 100.
100 isn’t so much.
But 1,000 . . . now that’s _ a lot _!
Fine. S2000, thanks for information.
thank you. we must assume each contract contains 100 options.
I was in an odd mood last night (or, rather, very early this morning).
I was thinking of this:
Hahaa…I know for this movie since schooldays in 80s.
But, in fact a lot is 100 options, isn’t it?