Does anyone have an idea on how to remember the value at expiration, profit, max profit, max loss etc of all the options (Box Spread, Butterfly spread, Bull spread…). They just seem too many…
Value at expiration is the easiest to remember, along with profit since you don’t actually need to memorize them but only be able to explain how they are constructed… For example if you know that a butterfly spread is long 1 call X1 short 2 calls X2 and long 1 call X3 with X1
In addition to CFALEB, I think that maximum loss is the easiest one because the maximum loss arrive only when you cannot exercise you option at all. Therefore, it is equal to the net cost you pay for the strategy except for the collar strategy since you most likely will not pay anything to get into a collar. As a result, the maximum loss for a collar is your So -X1 since one X1 is less than So, you will likely exrcise your put. is that help?
I found the options material VERY intuitive and didn’t need to ‘memorize’ anything other than the names of the strategies. I wouldn’t spend any time memorizing payoffs max profits/losses, I would spend my time understanding call and put payoffs based on long and short positions. Once you are an expert in option payoffs, applying it is no challenge at all.
Bankin’ Wrote: ------------------------------------------------------- > I found the options material VERY intuitive and > didn’t need to ‘memorize’ anything other than the > names of the strategies. I wouldn’t spend any > time memorizing payoffs max profits/losses, I > would spend my time understanding call and put > payoffs based on long and short positions. Once > you are an expert in option payoffs, applying it > is no challenge at all. I think that maximum profit and breaeven St require a little more dept, unless that i am missing something. I can derive the end result by using calculus but it is a long way unless you really need it. They only try to tell how to think about maximum profit and breakeven, but when the heat is really hot, you cannot recall those details. You just need to know some short cut and get it done.
tibwa Wrote: ------------------------------------------------------- > Bankin’ Wrote: > -------------------------------------------------- > ----- > > I found the options material VERY intuitive and > > didn’t need to ‘memorize’ anything other than > the > > names of the strategies. I wouldn’t spend any > > time memorizing payoffs max profits/losses, I > > would spend my time understanding call and put > > payoffs based on long and short positions. > Once > > you are an expert in option payoffs, applying > it > > is no challenge at all. > > > I think that maximum profit and breaeven St > require a little more dept, unless that i am > missing something. I can derive the end result by > using calculus but it is a long way unless you > really need it. They only try to tell how to think > about maximum profit and breakeven, but when the > heat is really hot, you cannot recall those > details. You just need to know some short cut and > get it done. Maybe it’s because I’ve traded options, but I didn’t find any part of any of the options examples (in Schweser) challenging at all. In fact, I skipped the actual material, went straight to the examples. Could you provide an example of strategy that you think requires (memorized) formulas to calculate breakeven or max profit?
As it relates to a Butterfly Spread with Calls, where we: - Buy one call with a low exercise price - Buy another call with a high exercise price - Sell two calls with an exercise price in between What is the benefit of purchasing the call with the high exercise price? Why not just perform a Bull Call spread? In other words why/when is a Butterfly Spread with Calls more advantagous than a Bull Call spread?
I would suggest only knowing how to construct any of these strategies… from there it is only math: 1- Value at expiration is the sum of the payoffs resulting from the options. ie, if you consider a bull spread strategy, you know it’s a long call and a short call, so the value at expiration is simply the sum of the payoffs: max(0, ST-X1) - max(0, ST-X2). 2- Profit is Value at expiration derived above minus the costs to enter the positon. The costs are always the premiums paid on the long options minus the premiums received on the short options. So for a bull spread, profit = max(0, ST-X1) - max(0, ST-X2) - c1 + c2. Just note that in the case of a collar, you have also the cost of the stock since it s a strategy that combines a stock, a long put and a short call. 3-The maximum loss is ALWAYS the net costs of the premiums pn the options. In a butterfly spread for ex, where you combine one long call X1, 2 short calls X2, a one long call X3, your maximum loss is the net cost: c1 - 2c2 + c3. (except for the collar) 4-The maximum gain whenever you have spread strategies, ie strategies that combine options of the same nature (only calls or only puts), is always X2- X1, the difference between the strike prices on the options, even in the case of the butterfly where you have also X3. In the case where you don’t combine options of the same nature, like protective puts and covered calls, logic or graphs are enough to determine the max loss. 5-As for the breakeven price, although it might take a few seconds more to derive, you can take the expression of profit you derived above IF IT CONTAINS THE TERM St and set it equal to zero and solve for St. In the case of butterfly spreads for ex, you have 3 expressions for the profit according to the price of St at expiration (St