options - show your calculations (formulas)

CFA Level III Derivatives
#1

Let’s assume that they are asking for price at which max profit occurs for a butterfly spread.

Can I say that max profit occurs when the price moves to the strike price of two short options? and then state the price? or do I need to show the formula for it?

#2

This is just an example. I am asking this question regards to break even price, max loss price etc as well.

This is how I have memorized instead of trying to memorize formulas… Let me know what you think.

Thanks,

#3

I think you just plug in numbers and calculate the profit - lets say you’re short 2 at $10, long 1 at $5 and 1 at $15. You could show

Profit = ($10-$5) - 2*($10-$10) + $0 - Premium paid

And then maybe follow up with a sentence, " for every move below $10 the value of the long $5 option diminishes and for every move above $10 the short calls appreciate by a total of 2x the long $5 call. For prices above $15, the long calls and short calls cancel. Therefore, max profit is at the price of the short calls."

#4

thanks