My strategy is to remember the option profit graph for each strategy then i can usually derive the profit formulas from that. but when a question ask for max or min then i’m screwed. Does anyone have a way to derive the max/min, breakeven payoff for all the option strategies given that you have the profit formulas?
Benbronco, You can gather what the min/max is from those pay off diagrams if you eye carefully the X-axis and then DONT FORGET to subtract the cost of the option and multiply by the # of shares if they ask for total cost vs. per option. The breakeven is a less intiutive. If someone can share this, would be great.
UAECFA Wrote: ------------------------------------------------------- > Benbronco, > > You can gather what the min/max is from those pay > off diagrams if you eye carefully the X-axis and > then DONT FORGET to subtract the cost of the > option and multiply by the # of shares if they ask > for total cost vs. per option. The breakeven is a > less intiutive. If someone can share this, would > be great. Can you elaborate, I’m not following.
try and understand the strategy. The formulas are for robots and excel sheets. Today I winged the max profit on a butterfuly spread by thinking it through, graphing in my brain etc. I think that’s better than some formula. I can say that about alot of formulas!
exactly,… butterlfly spread pays most at the peak, i.e. where St = Xm Add up the payoff on all options where St = Xm. SO; - Lowest strike call (LONG) = (XM-XL) - CL - Mid strike call (SHORTx2) = 2CM (only earn premium) - High strike call = - CH (lose premium, no profit) Total : XM - XL +2CM - CL - CH If you think back to the chart again, you can be certain to achieve maximum loss at any price along the flat line below the x-axis. For example, St = 0, XL, XH. Taking St = 0 is probably easiest. At this point, neither of your long calls are worth anything, and the guy that you SOLD calls to won’t exercise either, so it’s simply a loss of premia offset by premia earnt: CL + CH - 2CM Hope that helps!
By the way for breakeven prices; Upper Breakeven Point = Strike Price of Higher Strike Long Call - Net Premium Paid Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid Net premium PAID, as mentioned, is max loss, i.e. CL + CH - 2CM So if you want the formulae, they are XL + the above or XL - the above.
benbronco, whatever the option strategy, if you can remember the graph, you should be fine to remind the rest, event max and min, and breakeven prices. 1. remember the graph 2. look at when you reach max : is it when St < Xl when St > Xh ? 3. use the profit formula. for most of option strategies, you’ll get a fixed amount with some “St” cancelling some “-St” in the formula. 2’. let’s say you want to find breakeven prices. do the same, look at the graph, when does the profit line cross the horizontal axis ? St < Xl ? 3’. then use the profit formula from your specific option strategy and makes it equel to 0. For all of them (I’ve checked, no “St” cancelling each other), you always get the right St with this very simple equation.