Derivative Strategies chapter: Hard to remember...

Anyone else find that the derivatives strategies chapter is really difficult to memorize all the formulas? Particularly for the Bull spreads and Bear Spreads?

Does anyone know of a easy way to understand the intuition behind all this?

There’s no intuition.

You simply have to know (i.e., memorize) the payoff diagrams for each option strategy; from that you can construct the needed strategy on the fly.

@Hydrogen

Gd luck buddy. Took me at least 1 whole day to remember all the option strategies formulas… Try writing these formulas repetitively, and u can notice some pattern to the formulas. Once, u’ve mastered recalling these formulas, its free points to grab in the derivatives section.

Thanks… I guess I’ll just make a few flashcards and review it daily till it’s burned into my brain.

My two cents: steer clear from trying to commit the formulas to your head. Study the strategies’ “payoff profiles” closely as S2000 wrote and you’ll see that no matter the question thrown at you, whether calls/puts long/short w/ underlying position or without, you’ll be able to back into the breakeven prices, max profit, max loss, etc with relative ease. Google the more popular strategies (i.e., collars, bull/bear spreads, straddles, strangles), there are a wealth of online resources that show the payoff profiles and the dynamics that strike price and premium paid or received have on the spread’s characteristics.

Hello- thank you for your input. I know the diagrams and know which options to use for each strategy however I don’t understand how to derive the max gain/max loss/ breakeven from these diagrams. For example the bull call spread and the collar’s diagrams seem very similar, however the payoffs are very different. I have also tried looking online to understand how to use the diagrams however I can’t find anything useful. What do you look at in the diagram do determine all the payoffs? Thank you in advance.

GAAPIFRS, notice in the payoff diagrams that the y-axis is the profit and loss and the x-axis is the underlying’s price, that’s what you should be looking at. The line represents what the profit and loss of your position would be at expiration and how it is dependent on the undelying’s price at expiration. A long collar’s payoff profile (long underlying, long out of the money put, short out of the money call) is similar to a bull call spread where you bought an in-the-money call and sold an out-the-money call. This site looks pretty good and I’m sure you can find all the spread there: http://www.theoptionsguide.com/bull-call-spread.aspx