I’ve decided to not spend time memorizing formulas for all the different options strategies. If there happens to be a problem (or problems like the 2012 CFAI Mock PM…wft), then I’m just going to skip them. Simply too much. Anyone else in my camp on this?
My college professor taught me options well, so as long as I understand what the position entails (ex. covered call is long underlying + short call), I can figure out the profit by simple breakdown. There’s nothing to memorize imo beyond the very basics:
payoff on call = max(St - strike, 0)
payoff on put = max(strike - St, 0)
which are both intuitive enough that even these formulas probably don’t require memorization.
Do you see what I mean?
Or are you referring to other formulas? I haven’t gotten to the risk management part that requires you to calculate # of options purchased, which are really intimidating from what I’ve seen and may cause me to join your camp on this one.
dont give away points like that guys…once you realise that covered call/protective put are quite similar and that bull/bear spreads are very similiar…there isn’t that much to learn.
Option questions are so easy i can do them in my sleep. haha
you don’t need to even memorize the formulas…, just visualize the movement of the underlying relative to your strike price.
your max payoff can actually be less than 0 if it’s not a zero-cost option strategy…, since you would have paid for the option…, which is a cash outflow.
Strategies:
Covered Call / Protective Put Bull Spread / Bear Spread
Collar Option Strategy
Butterfly Spread / Box Spread
Straddle / Strangle
I think there’s also a Straddle with a Call Option / Straddle with a Put Option
“your max payoff can actually be less than 0 if it’s not a zero-cost option strategy…, since you would have paid for the option…., which is a cash outflow.”
doesn’t make sense. Why would anyone invest in a strategy with the maximum payoff being a loss?
Probably semantics. Sounds like he’s referring to profit as opposed to payoff, with a misleading use of “max”.
Perhaps what I wrote here will be helpful to you. I am memorizing very little now, but I know how to derive the rest.
http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91308942
If you can memorize the shape of the payoff associated with the name of the strategy, then you can derive everything you need to know.
like someone up there said, they are very easy if you get the basics
all you need to do is master the put and call, and then have a paper with the drawing of each of the required stratagies that you glance at everyday i have an image of the statagies in my head, and because i undertstand the basics, using that image from my head i can figure out what is needed to draw the shape
if i want a line going up from right, i will buy a call
if i wana flatten that line, i sell a call, if i wana make it go down, i sell another call, if i wana make it flatten again i buy a call… same logic with puts…
you can do it!!!