Straddles
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 Vertical 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
A customer buys 100 shares of XYZ stock at $80 and buys 1 XYZ Oct 80 Put @ $3 on the same day in a cash account. The stock rises to $88. The put expires and the customer sells the stock in the market at the current price. The customer has a(n)
$500 gain
**T-Chart out profit gains and losses to keep track of money
How would this client close out this position:
Long 1 ABC Jan 50 Call
Write 1 ABC Jan 50 Call
Since you started with an opening purchase, then you would need to have a closing sale.
List the Max Gain and Max Loss of a Short Straddle
What about a long straddle?
Short Straddle:
MG: Total Premiums
ML: unlimited :(
Long Straddle:
MG: Unlimited :)
ML: Total premiums
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 customer buys 100 shares of ABC @ 71 and wants to protect their position, what option should they get?
What would they do for income?
Buy a put for protection
Sell a call for income
A customer buys 100 shares of ABC at $71 and buys 1 ABC Jan 75 Put @ $8. ABC goes to $61 and the customer exercises the put. The customer's loss is:
$400
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
A customer writes 1 WYN Feb 60 call @ 4 and 1 WYN Feb 60 put @ 6. What are the breakeven points and when would the client profit?
70 and 50
The client profits as long as the market stays BETWEEN the two breakeven points.
A client wants the options to expire with a short straddle.
A client opens the following positions:
Long OMG Apr 65 Call @ 8
Short OMG Apr 70 Call @ 4
What is the lowest price at which the client will earn their maximum profits.
Is this an annoying question.
Once the CMV reaches 70, the client will hit the point where they earn their maximum profits.
Note that the client can still hit their maximum profit past 70, but won't hit their maximum gain with anything below 70.
Find the BE, MG and ML of the following position:
Short 100 shares of LOL @ 65
Buys 1 LOL Mar 60 Call @ 6.
BE: 59 (65-6)
MG: $5,900 (6,500-600)
ML: $100 (65-66)
A customer buys 100 shares of JKL at $30 and sells short 100 shares of GHI at $40. The customer then buys 1 JKL Jan 30 put @ 2 and 1 GHI Jan 40 call @ 4. GHI rises to $50 and the customer exercises the call. JKL falls to $20 and the customer exercises the put. What is the customer’s net gain or loss?
$600 Loss
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
If a client owns a long straddle are they bearish or bullish?
What about a short straddle?
Trick question. lmao
They are neither bearish or bullish for a long and short straddle.
Straddles/combinations tend to play both sides of the market.
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
An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50, and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes
$200 Profit
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
If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at 47.25 and immediately sells the stock in the market, what is the investor's profit or loss?
$150 Loss
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)