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Unformatted text preview: ke price A, as the shares can't fall below zero. Loss: The maximum loss for this trade is the premium paid to buy both options. Volatility: The option value will increase as volatility increases which is good for both options. Alternatively a decrease in volatility will be bad for both options. Time Decay: As each day passes the value of the option erodes (bad). Profit 0 A Loss B Event Driven 21 SHORT BUTTERFLY Construction: Sell 1 Call at A and Buy 2 Calls at B and Sell 1 Call at C. Sell 1 Put at A and Buy 2 Puts at B and Sell 1 Put at C. Sell 1 Call at A and Buy 1 Call and 1 Put at B and Sell 1 Put at C. Sell 1 Put at A and Buy 1 Put and 1 Call at B and Sell 1 Call at C. Margins: Depends on how it is constructed. Your Market Outlook: Volatile/Event Driven. Volatility will increase. If it does both bought options will increase in value. You are unsure of the direction of the stock but you think it will make a large move. Profit: The maximum profit for this trade is limited. The break-evens are at B plus or minus the cost of the sprea...
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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