Straddles all scare me! Argh!! I think there may be a question from one of these spreads. I hate derivatives hope they don’t have too many questions on them.
Just remember the strategies. I know formulas are tough to remember but at least due to strategies, you might be able to cancel out 1 option.
cfaboston28 Wrote: ------------------------------------------------------- > Just remember the strategies. I know formulas are > tough to remember but at least due to strategies, > you might be able to cancel out 1 option. thanks… you’re up late! i think i remember you from L2, contrary to urban legend, i think studying for l3 is harder…
Yes heading to bed. Having a glass of wine after a marathon session today. What about you? I remember you from L2 too. Yes L3 is harder for sure. People who say L3 is easier than L2 are those who have taken this exam pre-2006. Since 2007, urban myth has changed. Hopefully we both will pass and won’t have to look back again.
Right this stuff is not as hard as it seems! Forget the formulas, its easy to workout without. Try to remember what each one is and what the graph looks like. Then do yourself a little grid with the payoffs at each strike price. The graph changes direction at and between strikes so thats all you need to know. Once you have these payoffs plot the chart and you can easily calc the breakeven and max losses/profits. Use the CFAI book examples to get some practice.
+1 if you can remember what each is made up of, just make yourself a quick payoff table and your good to go. those formulas are a joke.
I managed to get the questions on the mock exam all correct despite never even looking at the formulas. Just know the general shape of each of the option strategies. It helps to know which options to use to construct them, but even if you don’t, you can figure that out by just drawing the shapes of the available options and adding them to get your desired shape. Then calculate the payoff of each option, add them up, and you’re set.
hey guys, I am struggling to memorize the breakeven for each strategy, all the other stuff can be retained thanks to the payoff diagram… Any advice for the breakeven? thanks, M.
no need to memorize the formulas, just remember how to construct the strategy then stress test the different portions of the strategy. I would type out my technique but sort of busy at work.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > no need to memorize the formulas, just remember > how to construct the strategy then stress test the > different portions of the strategy. I would type > out my technique but sort of busy at work. just struggling with damn breakeven… 
Any advice will be welcome. thanks! M.
easy. figure out your net premium paid. then use your payoff table to find where you make that amount of money.
malek_bg Wrote: ------------------------------------------------------- > BiPolarBoyBoston Wrote: > -------------------------------------------------- > ----- > > no need to memorize the formulas, just remember > > how to construct the strategy then stress test > the > > different portions of the strategy. I would > type > > out my technique but sort of busy at work. > > > just struggling with damn breakeven… Any > advice will be welcome. > > thanks! > M. lets say u constructed a bull spread with calls. Stock is at 50 Buy call @ Strike at 60 for 5 premium Sell call @ strike at 70 for 2 premium net cash outlay is a loss of $3 (5-2) So stock has to go up above $3 for you to make money, stock has to go up to $63 (60+3) for breakeven. Exercise call at 60 and the other call expires worthless. For max loss just plug and play with stock going to 0 and max profit if the stock goes to 100. Way easier then call-put parity.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > lets say u constructed a bull spread with calls. > > Stock is at 50 > Buy call @ Strike at 60 for 5 premium > Sell call @ strike at 70 for 2 premium > > net cash outlay is a loss of $3 (5-2) > > So stock has to go up above $3 for you to make money, stock has to go up to $63 (60+3) for > breakeven. Exercise call at 60 and the other call expires worthless. For max loss just plug and play > with stock going to 0 and max profit if the stock goes to 100. > > Way easier then call-put parity. For max profit, how to decide the price to plug and play ? (In your example, 100) TKS !
AMC, use nice round numbers that is easy to calc. But I just use 100 and 0 because its easier to do the math in my head.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > AMC, use nice round numbers that is easy to calc. > But I just use 100 and 0 because its easier to do > the math in my head. As long as the price is high enough (relative to highest exercise price), in case of “call” ? And this rule is opposite for “put” ?
how to calc B/E. draw the diagram marking out the strikes. all the diagonal lines on the diagrams move one for one. so you can easily work out what the breakevens are (where the diagonal lines cross the x-axis) just by looking at it. If you have the strikes marked out and the max loss and max profit.
AMC Wrote: ------------------------------------------------------- > BiPolarBoyBoston Wrote: > -------------------------------------------------- > ----- > > AMC, use nice round numbers that is easy to > calc. > > But I just use 100 and 0 because its easier to > do > > the math in my head. > > As long as the price is high enough (relative to > highest exercise price), in case of “call” ? > And this rule is opposite for “put” ? yup, just play around with a couple of bear puts, bull calls, butterflys, collars, etc. you’ll see the logic
In the formulas they give you for Bear and Bull Spreads… I know you buy two options, one with a higher strike and one with a lower strike… however, I’m trying to wrap my head around which is which… which has the higher strike: p1 or p2? which has the higher strike: c1 or c2?
When you are constructing a bear spread, you are expecting that the market will decline… (example, recession)… when you are constructing a bull spread, you are betting that the market will go up… now… to choose which options? you can construct either spread with either calls or puts… there is no difference… If you choose calls to build a bull spread - buy Lo sell Hi (Lo = lower strike… Hi = higher strike). The reason behind this is that you are betting that the market will go up, hence you should buy call with a lower strike price to take advantage of upper price movement. Now if you think you are in the bear market, then buy Hi and sell Lo. (in this case, more often than not, puts are used… buy Hi sell Lo puts - inverse of BULL spread)… I apologize if I confused you even more…
hm…not getting a hold of this …the graphs are a nightmare and the formulae are for me what they are for you…which way out do you recommend…?