1. Butterfly spread is appropriate for an investor who thinks large stock price movements are unlikely.

(Add figure 9.6 and 9.7)

2. Stock price has to move further in a strangle than in a straddle for the investor to make profit. Secondly, if stock price ends up around the strike price, then downward risk is higher in straddle than strangle.

(Add figure 9.10 and 9.12)

3. A strangle can be created by buying a call option with strike price $50 and buying the put option with a strike price of $45.

Payoff from strangle

Range of stock price payoff from call payoff from put Total payoff

S£ 45 -2 45-S-3 40-S

45<S<50 -2 -3 -5

S³50 S-50-2 -3 S-55

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8. protective put strategy involves buying a put option on a stock and stock itself. Long position in call option is equivalent to protective put.