max profit, breakeven, max loss formulas for bear put, bull call, box, straddle, butterflies, etc

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theCFAway

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What is the likelihood that these formulas for calculating the max profit/loss, and breakeven figures for the option strategies on SS 15 will actually show up on the exam and occupy major points? I trying to figure out the logic for most of these, but some are just not really that intuitive for me and it’s taking me a lot of time to understand them, expecially the buttlerflies. Sometimes i think it’s better to just memorize the formulas, but then again i’m thinking it might not even be worth the time. I think as long as we know what they are and when someone would want to use it should cover a good amount of the questions on the exam. Would you guys agree?
 
it has been asked before - look at the 2010 exam…
so go figure if you want to take a chance like that.
With CFA - anything is fair game.
Understand the diagram. Understand the strategy (what pieces are combined)
Like Butterfly - 1 Long Call at X1, 2 Short Calls at X2 and 1 Long Call at X3.
Now write out the equations for each.
Vt = Max(0, St-X1) -2 Max(0,St-X2) + Max(0, St-X3)
V0 = c1 + c3 - 2 c2
Profit = Vt - V0
Diagram tells you max profit is at X2.
Vt = X2 - X1 (coming from X1 leg - other two are zero).
Max Profit = X2 - X1 - (c1 -2c2 + c3)
A good way to find the breakevens.
—————-
If St < X1 -> the Vt = 0 …. gives you max loss (which is -V0 in any case).
X1 < St < X2 -> Vt = St - X1 –> has St so this will provide one breakeven.
St -X1 - (C1 - 2C2 + C3) = 0
St = X1 + C1 - 2C2 + C3
—————
X2 < St < X3
Vt = St - X1 - 2 (St - X2)
= 2 X2 - X1 - St
2X2 - X1 - St - (c1 - 2c2 + C3) = 0
St = 2X2 - X2 - (c1 - 2c2 + C3)
—-
going from basics is the best way.
 
okay-after about 20 hrs i think i’ve finally got these. Not sure if it’s worth all that time. i hope i won’t end up forgetting this when i do my review next month.
Thanks!
 
Every morning you get up, first thing i do is writing everything out once along with performance attribution formulas from memory. Come exam day, it will be a click
 
I haven’t memorised the formulas. I know how to work out the max profit, max loss and BEP (However I do have some prob with that one from time to time) and I derive the formula from there. Otherwise, just learning the formula as is is not intuitive at all for me
 
My strategy is trying to remember what it is, and then how it work.
like butterfly: long call at x1, short 2 calls at x2 and long call at x3 - that is what it is
and how it work is that:
2 long position are ur asset, 2 short position r ur liabilities. Net asset = value of 2 call - value of 2 short (=asset-liabi)
Now, the situation is that the investor will get (max) profit when the price of underlying asset close to x2 when price of 2 short close to 0.
And loss when value of 2call minimized, or price of underliying close to X1 (2 long call value close to 0)
I use assets - liabilities relationship in many others and prob more easy
 
To deal with the options strategies, we have to memorize something. Here is what I got:
1, Put: max(0, X-ST)
2, Call: max(0, ST-X)
3, All put/all positions in each strategy. For example, box Spread(Bull call spread + Bear Put spread)
4, Graphs helps to recover something left.
5, Notations: X, S(0/T); X(L/M/H); C(L/M/H, 0); P(L/M/H, 0)
Given enough time, it’s hardly to make mistake. But we are in a stress mode, so it depends… Choose the most suitable stragey on June 2.
 
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