I’ve gone through the formulae for covered calls, protective puts, spread strategies, collar, straddle etc multiple times but can’t seem to retain it. Is there an easy way to memorize the ones given in Schweser and remember what each means? With less than a week left this is really freaking me out
I found it much easier to use the basic graphs and reconstruct the formulae.
+1… I’d spend your time studying the “risk profile” graphs (y-axis has profit/loss, x-axis has underlying asset’s price) to get a better handle on the material.
Thank you for your inputs! Are these graphs in the CFAI curriculum books? Cause they’re nowhere in Schweser.
I believe that they are, but I don’t have access to the curriculum at the moment to check myself. If not, a quick search on Google for “risk profile of straddles” (or calendars, verticals, strangles, etc.) should do the trick too.
Let’s give it a try. I will explain how I try to retain it (hopefully I am correct)
We always deal with 3 scenarios: max. gain, max. loss, and breakeven price
- Collars:
Max. gain: Upper bound number that you can spot (slightly higher than stock price) - current stock price - (Po - Co)
Max. loss: current stock price - lower bound number (slightly lower than stock price) + (Po-Co)
Breakeven: stock price + (Po - Co)
- Covered call
Max. gain: X- So+Co
Max. loss: So -Co
Breakeven: So-Co
- Protective Put
Max. gain: St- (So+Po)
Max. loss: So + Po -X
Breakeven: So + Po
- Bull call spread
Max.profit: Difference in strikes - net premium
Max. loss: Net premium
Breakeven: Lower strike + premium paid for long position - premium received for short position
- Bear put spread:
Max. profit: Difference in strikes - net premium
Max. loss: net premium
Breakeven: Upper strike + premium received - premium paid
- Straddle:
Max. profit: a) starts from strike - total premium paid (profit on downside) and b) starts from strike + total premium paid -->profit on upside. So if you buy a call with a strike of 100 and pay USD 5 for it and buy a put with the same strike and pay USD 4 for it, you will make money from 91 downwards and from 109 upwards.
Max. loss: Total premium paid
Breakeven: a) Strike - total premium paid & b) Strike + total premium paid. 91 & 109 in the above example.
I would expect the CFAI material to have the graphs. Otherwise, as suggested by Black8Mamba23, search teh interwebz.
Thanks for your inputs guys! Will search for the graphs tonight.
Mr RS, that’s nice and handy explanation for all the strategies to include in my flash cards. Thank you!