i’m reading the risk management app in option strategies… The formulae for all the major options like bull call spread is driving me crazy… According to the Los, it seems we need to memorize all the max profit, max loss etc… Any one has any way of memorizing them?
don’t memorize. understand. Bull call spread - long a call with a low strike. Short a call with a higher strike. Max profit occurs at the higher strike price. why - because when the stock rises to and above the high strike price the option you were short is now in the money, and every cent at and above the high strike offsets your long option that you have (therefore incremental profit is zero)… so just understand how to figure out max, mins etc rather than memorizing formula’s.
My 2-cent. This trick seems to work well for me: what is the golden rule in investing? Buy low, sell high. For a Bull Call, buy a low strick, sell a high strike. For a Bear Put, buy a high put, sell a low put. This seems to work well for. Hope it helps you too to “memorize”. Usually in order to figure out the max and profit and max loss. Just ask yourself, what happen if stock goes to 0 (max loss for call, max profit for put), and what if stocks goes to infinitiy (max profit for call and max loss for put).
I have created an option analyzer in excel that analyzes p/l and all greeks and graphs the p/l and some of the greeks (delta, theta). It supports both single leg and two leg combinations including ability to combine a position in the underlying. It is very good at performing what-if analysis, visualizing strategies and the effects of changing any of the inputs. I am willing to share it with anyone on AF. I am particularly keen on getting feedback to make it better.
jackoliver, I can have a copy of your spreadsheet? thanks.
Thanks for the input… Certainly helps. Jackoliver, thanks for the offer and i’ll be most glad to take it up. Please send to mervyn156@gmail.com.
Jackoliver, I also am interested in your spreadsheet. I really struggle trying to visualize all the different strategies. I will gladly provide any feedback or suggestions. hhenthorn@gmail.com.
nailittwice - I am happy to send it to you but need your email address.
They say a pictures speaks a thousand words. Besides, in my opinion, you need to take a step back and think how many questions will or can they ask on options - I guess 2-3, they say swaps are the favorites: anyways, let’s say Bull Call 1: What is it your doing- Its a “BULL” and a “CALL”, so you are expecting the stock to rise 2: Great, so buy a call option. Obviously you will be forced to buy it below the stock price 3: Wait a minute, you bought a call then you also paid something for it i.e prem. You want to minimize this cost. Hence write a call, to earn a prem, at some strike price. Make this strike price so high such that the stock will never go above this strike, at least in your opinion. So, you have an upper and lower limit: ---------------- Sell Call, Xh and Ch0 * Stock’s prob here ---------------- Buy Call, Xl, Cl0 This formula is the only one you need to “know”, funny thing is you already know it: Profit = how much you can make on long call - how much you can loose on short call + Prem recvd - Prem paid Profit = max(0, (St - Xl) - max(0,(St-Xh)+Ch0-Cl0 Max Profit: From the figue above picture when will you make the most money. When, the stock is at a price = strike of the call you wrote i.e. St = Xh substitue this in the equ above Max Profit = Xh-xl+Ch0-Cl0 ||ly, Max loss will occur if the stock does nothing and St=Xl, sub. this into the formula Max Loss=Ch0-Cl0 And Breakeven price is the price of the stock at which any gains on your long call which will exactly offset your cost of Cl0 - Ch0. So, the stock has to rise, Xl+(Cl0-ch0) to BE. Hoep this helps.
trymybest - thanks. Very clear explanation i must say
Jackoliver, thanks for your email…!!!
Jackoliver, looks like your spreadsheet is becoming popular… Can you to share with me as well? slavaraikov@hotmail.com Many thanks in advance!
Jackoliver, yeah, hope this is my last year of CFA preparation.
Jackoliver, i would greatly appreciate if you could email me the spreadsheet as well. klim777@yahoo.com Thanks.
hi jackoliver could i also have copy of your programme-the email address is g_sahathevan@hotmail.com thanks