I am doing a CFAI Problem from “Application Of Derivatives - Omega”. I can’t write the whole problem out, but this is curious: The Profit On A Collar includes the difference between St and S0:

Profit Per Collar=St + max(0, x(put)-st) - max(0, st-x(call)) - putpremium - callpremium.

But the Bull Spread Payoff features only the options, not the difference of St-S0:

(HigherExercisePrice - LowerExercisePrice - LowerCallPremium + HigherCallPremium.

Why is this?

P.S. If you need me to write the problem out for context I can, but I was more interested in whether these two formulas are always different in this way.

JJ1337
May 26, 2015, 8:08am
#2
A collar includes the underlying (so, long the underlying); a bull spread does not include the underlying.

Thanks JJ1337. Are there any other option “procedures” that automatically include the underlying?

JJ1337
May 26, 2015, 8:18am
#4

rellison:

I am doing a CFAI Problem from “Application Of Derivatives - Omega”. I can’t write the whole problem out, but this is curious: The Profit On A Collar includes the difference between St and S0:

Profit Per Collar=St + max(0, x(put)-st) - max(0, st-x(call)) - putpremium - callpremium.

But the Bull Spread Payoff features only the options, not the difference of St-S0:

(HigherExercisePrice - LowerExercisePrice - LowerCallPremium + HigherCallPremium.

Why is this?

P.S. If you need me to write the problem out for context I can, but I was more interested in whether these two formulas are always different in this way.

I think your collar profit equation is incorrect. Collar’s long put short call so the call premium should be added

^ several mistakes in the equations.