any tips on how to get thru these? … payoff are not a problem, but i have no idea how to calculate max profit/loss and the breakeven without mugging the formulas
Max Profit/Loss… Input a 0 and then use say 1,000. If the value for the 1,000 number is close to 1,000 then you know the profit and/or loss is Unlimited.
max loss = net premium max profit = underlying moves where you want up the limit - net premium breakeven = current level + movement that compensates net premium difficult things (not too much): + box spread = just check you earn the risk free rate, if not there would be arbitrage + collar = is not the collar “only”, also consider you are paying for the stock. By the way, the collar does not necessarily have to be a zero cost collar hope it helps
Now Let’s Review: Bull Spread: Buy a low call and Sell a High call Bear Spread: Buy a high put and sell a low put Butterfly: Buy a low call, sell two medium calls, and buy a high call or Buy a low put, sell two medium puts, and buy a high put Collar: Own Stock plus Buy a put and sell a Call Saddle: Buy a Call and Buy a Put for the same Strike Price Box: ??? What else?
box: Buy a call spread and a put spread, both with same strikes if you end between the strikes, you get real upside with the call + “pending” upside with the put but: a. if you move above higher strike, you get call spread only (puts = otm) b. if you move below lower strike, you get put spread only (calls = otm) so you will ALWAYS get the difference between the 2 strikes (minus net premium, of course) this means that this strategy should earn the risk free rate
So Box is Bull + bear spread?
thank you… i need to learn what strategy means what… only if it was as simple as they tell us buy X, sell Y… determine payoff… i have developed an aversion to options… swaps i am ready to do in my sleep but options. . . . max loss = net premium … always ?
bigwilly Wrote: ------------------------------------------------------- > So Box is Bull + bear spread? Yes 20 and 30 as strikes, for example a) if I end between (24), call spread gives me 4, and put spread gives me 6 (total = 10) b) if I end above (40), call spread gives me 10, and put spread gives me 0 (total = 10) c) if I end below (8), call spread gives me 0, and put spread gives me 10 (total = 10) whatever happens I get 10, the difference between strikes
with box spread, the net premium you pay for the bull + bear spread should equal to the spread you are bying discounted at risk free rate, if its higher or lower arbitrage is possible, hence box spreads are used to exploit mispricings in options using hala’s example, you are buying a spread between 20 and 30, so the value of the spread is 10; lets say Rfr = 2% and all options are 1 year options; to construct this box spread, you’ll be: buying call with 20 strike, selling call with 30 strike bying put with 30 strike, selling put with 20 strike now to see if arbitrage is possible, you need to callculate your cash flows from the options you bought and sold to 10/1.02^1 = 9.8 if the price you pay for 20 strike call, 30 strike put and the premium you receive for 30 strike call, 20 strike put is less than 9.8, then you buy the box spread. Let’s say you can buy it for 9.5, then your arbitrage profit will be 10/1.02^1 - 9.5 = 0.3 if the premium for the options is higher than 9.8, then you would sell the box spread (i.e., sell bull and a bear or sell 20 call, buy 30 call and sell 30 put, buy 20 put). Lets say you can sell it for 9.9, then your arbitrage profit will be 10/1.02^1 - 9.9 = -0.1 (negative value is your profit since your are short) In reality, however, options are usually fairly priced, plus its tough to exploit small misprissings even if the do exist because of the bid/ask spreads on options, and especially if you are using crappy broker who only allows you to trade options in 0.05 cents increments (Interactive Brokers allow you to do it in 0.01 cents increments). If someone is interested take any company and look at life option prices for a particular spread and see that it is unlikely you can construct a box spread that will even allow you to earn a risk free-rate.