Various Option Strategies Payoffs Formulae - Tips?

Ok, so I’ve been looking at the formulae for various option strategies like Covered Call/Protective Put/Bear Spread/Bull Spread/Box Spread etc etc regarding Profit, Maximum Profit, Maximum Loss and Breakeven Price and they are super ugly. Must be over 50 in total. Does anybody have some tips on how to remember all these formulae for each strategy. :stuck_out_tongue: I’ve been able to construct the formulae through logic but there won’t be enough time to construct them in the exam. I’m hoping there has to be some method to remembering these ugly formulae.

The method is . . . don’t even try to remember them.

You need to remember the payoff diagrams – there’s no getting around that – but once you’ve done that you can build any particular option strategy on the fly and do the calculations from that.

I wrote a series of articles on option strategies that go through the payoff diagrams, building each strategy from scratch, and how to calculate the maximum profit maximum loss, and breakeven, all without any ugly formulae; you’ll find them here: Option Strategies | Financial Exam Help 123.

(Full disclosure: as of 4/25/16 there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here:

This is on my list to spend a couple of full days on, although I still haven’t settled on a plan of attack. It will likely be some combination of what Bill mentioned above and simply memorizing some of the easier formula and pricing relationships.

For every exam I’ve had some sheets taped to my bathroom mirror to review while shaving/brushing etc. For Level 1 it was the Dupont tree. For Level 2 it was FRAs and FCFF/FCFE calculations. For Level 3 it will most definitely be option payoffs. It just seems like easy points if you can get your head around it come exam day.

I personally intend to memorize 6 strategies

  1. Covered call
  2. Protective put
  3. Collar
  4. Long straddle
  5. Bear (call) spread
  6. Bull (call) spread

Not that hard really, given that there are some patterns to help memorize and especially that I can forever forget about it at around 4:30 PM on June 3.

If you can memorize those, you exactly memorized all. Box spread is Bear spread + Bull Spread.

Collar is Protective Put + Covered Call.

Straddle = ATM Put + ATM Call with same strike.

Strangle = same but cheaper version with OTM option.

Butterfly is also not complicated as it looks like, Buy Low, Buy High, Sell two Middle.

Seagul is related to Forex chapter.

It would be dumb and ridiculous to memorize those formulas. Once you know how to do a payoff diagram you are good to go. So, what would you choose, memorize 50 formulas, or learn how to do a diagram? My decision is easy IDK about you. Its not just the formulas either. From mocks I have been seeing more of a trend towards “what are one or two ways to reduce hedging costs?” or “when is it appropriate to use this or that strategy”.

Why would be dumb and ridiculous to memorize formulas? I solved this in 2-3 days months ago. Beside, only memorizing, I tried to understand each position. Payoffs diagrams are not necessary at all. Because it helped you, it might not be that same would help to others.

Options are one of my favorite topics. Currencies and taxes are on 2nd and 3rd place.

I had the same problem, remember the payoff diagrams and what they consist of (long call, short put, whatever) and u can work out the different scenarios…here is some flavor "when is max loss I wonder…oooo well when S


Add butterfly

hi biuku, i am trying to contact you via PM.

I left it out on purpose. Judging from topic tests and past papers it is rare and given the complexity it is not worth the potential 3 marks.