Study Session 13 - Reading 39 RM Option Strategies

Is dead to me. Or it’s going to be the death of me. This is one section I REALLY needed to spend more time on earlier. Any hints on all the option payoff strategies??? Feelin pretty overwhelmed right now. Edit: Missed part of my rant. Seeing that I work in a Treasury dept. in banking you’d think I’d be OK with this stuff. I work with most of these things all the time. But seeing as all I have to do is plunk some numbers into an excel spread sheet…WHY THE HELL DO WE HAVE TO MEMORIZE ALL THESE FREAKING PAYOFFS. Crock of crap.

Big Babbu: Just know: • To buy (long) a Call = MAX(S-X,0) (for some reason, see the word ‘sex’ when I write out the call. as in call girl…) • To buy (long) a PUT = MAX(X-S,0) (just the opposite of call) To sell, put a - sign in front of them *** DONT MEMORIZE ALL THE PAYOFFS - JUST MEMORIZE PUT/CALL FORMULA AND THE VALUE FORMULAS FOR THE STRATEGIES *** Memorize what the strategy is for: (Draw out the graphs) • Bull: market to go up (Buy Lower Strike Call and sell a higher call to offset the cost) - Net Cash Outflow because X1 costs more than X2. • Bear: Market to go down (Buy Higher Strike Put and sell lower strike put to offset the cost) - Net Cash outflow becuase X2 costs more than X1 in a put • Butterfly: Market to be stable (Buy a lower call and a higher call (X1 and X3) and sell 2 calls at X2 - your ‘current’ price. You only lose money if the market moves up or down. • Straddle: Market to be volitile - Buy a put and a call at the same strike Price ‘X’ - your current price. _ you only lose money if nothing happens. • Collar: Similar to Bull Spread but you actually own the stock - Limits your gains and loss • Box Spread - used to capture arbitrage profit - its a combination of a bull + a bear spread strategy. If you know the graph shapes, the formulas for the overall strategy, you can usually wing the max profit, max loss, profit and value. You just figure out your S-x, or your X-S and then add in any money received from the sale of a call/put and subtract the costs of a call/put purchase. Trust me… this is not my forte and it was actually pretty easy. D_M

oh man I never memorize those payoffs. I just think of a price (which is usually given in the q) and apply call and put. just figure out the payoff. for max or breakeven stuff, just try few numbers in ur head and u find the soluyion. and always remember roughly the payoff charts so u will know what ends will be breakeven, min loss, max gain… and bigbaboo , this CFA crap is all about memorization. in practivce i cant think of anyone making a decision or calculating something without referring to a book or something. who calculates a swap value (if calculate by hand) with what they have memorized anyway… just a test of how well u can memorize…

VALUE FORMULAS • Bull: V = max(S-X1,0) - max(S-X2) • Bear: V = max(x2-S) - max(X1-S) • Butterfly: V = max(S-X,0) - 2 x Max (S-X2,0) + max(S-X3,0) • Straddle: V = max(S-X1,0) + max (X1-S,0) • Collar: V = S + max (X1-S,0) - max (S-X2) • Box Spread: V = max(S-X1,0) - max(S-X2) + max(x2-S) - max(X1-S) (** BULL + BEAR ***) Then throw in the money you received or paid for the options to get to profit - draw the graphs (rough draw) and you can see the max loss, etc.

Thanks for all that. Just looking at your formula’s I can start to make sense of it when you say to through in the premiums paid or received to calculate the payoff. Much appreciated!!

NP - hopefully you feel more comfortable and ready to get more points outta this turd of a subject.

i hate this section including the effective int rates on a loan think we will have to calc that on the exam?

ChiTownBull Wrote: ------------------------------------------------------- > i hate this section including the effective int > rates on a loan > > think we will have to calc that on the exam? you can count on one hand is amount of relevant sections on this exam (you can promptly chuck ethics and gips)