Straddles
Give an example of a Long Straddle
Long call + Long put
Give an example of a spread
Long Call + Short Call or Long Put + Short Put
(remember SODA: Same Option Different action)
When are calls in the money? puts?
Calls: CMV > XP
Puts: CMV < XP
*remember: Call UP, Put Down
How would this client close out their position:
Long 100 shares of ABC at $45
They would sell 100 shares of ABC
When would an investor use a Long Straddle?
When would an investor use a Short Straddle?
Long Straddle: when market is expected to be volatile.
Short Straddle: when the market is expected to remain stable
What type of spread is listed below (be as specific as possible!)
Long 1 ABC Oct 50 put @ 5
Short 1 ABC Oct 55 put @ 7
Bullish Credit Put Spread
There's more money coming into our pocket vs going out (credit). The Short Side has the higher premium (short put = bullish market attitude). They are both puts (put spread)
What is the client's dominant market attitude in the following position?
Long 100 ABC stock
Long 1 ABC put @ 4
Client has a BULLISH market attitude since they are long the stock and want the price to go up to infinity.
*remember: stock position will always be the dominant position
What is the IV of this options contract:
Long 1 XYZ Jan 65 call @ 8
CMV XYZ is $63
IV = 0
*Remember Call UP and there is no such thing as negative intrinsic value
List the Max Gain and Max Loss of a Short Straddle
MG: Total Premiums
ML: unlimited :(
In this spread, which options contract would have the higher premium:
Long 1 JKL May 40 call
Short 1 JKL May 50 call
The Long call (making this a debit spread)
*Remember the acronyms:
CALS (Calls Add to Lower Strike)
PSH (Puts Subtract from Higher strike)
A client is seeking protection on their Short Stock position, what should they do?
They should buy a call
Step 1: figure out the dominant market outlook
Step 2: figure out what we do not want to happen (in this scenario, we don't want the price to go up)
Step 3: remember, full protection we are purchasing something, additional income we are selling something
What is the MG on the following position:
Long 100 shares XYZ @ $40
Long 1 XYZ Aug 40 put @ 4
MG: unlimited
*remember, the stock position is dominant
A customer buys 1 LMB Aug 70 put for 4 and 1 LMB Aug 70 call for 4. What are the breakeven point(s) for the customer?
The customer must recover the $800 spent in premiums (70+8 for call and 70-8 for put)
Calculate the Max Gain & Max Loss for this spread:
Long 1 GHI Jun 30 Put @ 3
Short 1 GHI Jun 40 Put @ 7
Bonus: What type of spread is this?
MG: $400 (best case scenario, both expire)
ML: -$600 (worst case scenario, both exercise)
Credit Spread
*Remember: Credit Spreads profit when they narrow and we want them to expire
Credit, Narrow, Expire (all 6 letters)
Find the MG and ML of the following position:
Long 100 shares of LMN @ $45
Short 1 LMN Aug 45 call @ 4
MG= $400 (49-45)
ML= $4,100 ($400 - $4500)
*helpful tip: Use a T-Chart to determine what is coming in vs what is going out
A customer buys 1 XYZ Aug 60 call @ 4 and 1 XYZ Aug 60 put @ 2 when XYZ is at $61.25. If the stock rises to $68 and the customer lets the put expire and closes out the call at intrinsic value, what is the result?
$200 gain
IN | OUT
-------------------
8 (IV) | 4 (purchase for the call)
| 2 (purchased for the put)
An investor opens the following options position:
long 1 FOZ Mar 40 call @ 3
long 1 FOZ Mar 40 put @ 2
What is the customer's MG, ML, and BE?
MG: unlimited (long call)
ML: $500 (premiums paid, both option expire)
BE: $35 & $45 (40-5 (put) & 40+5 (call))
Find the BE, MG, and ML of this spread:
Long 1 MNO May 65 call @ 8
Short 1 MNO May 75 call @ 4
Bonus: What type of spread is this?
BE: $69 (CALS 65+4)
MG: $600 (difference b/n XP less the premiums paid)
ML: $400 (the net debit aka the difference b/n premiums)
*remember: Debit Spreads profit when exercised and when margins widen.
Your DR will tell you to Exercise if you Widen
Find the BE, MG, ML of the following position:
Sell 100 shares of ABC @ $43
Short 1 ABC Oct 40 put @ 4
BE: $47
MG: $700 (47 - 40 = 7 x 100) (think what is the best case scenario)
ML: Unlimited (worst case scenario, price goes to infinity)
*helpful tip: Use T-Charts
What is this (be specific):
S 1 Jan 60 put
L 1 Jan 50 put
At what price would the client see gains on this position?
Credit Bull Spread, client wants price to stay above $60
*Remember: Credit -> Expire -> Narrow
if you Narrow, you will Expire (CRoak)