finquiz - smart summary_ study session 17_ reading 59
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Smart SummariesTRANSCRIPT
2015, Study Session # 17, Reading # 59
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“RISK MANAGEMENT APPLICATIONS OF OPTION STRATEGIES”
59.a
� Maximum loss for long on call = c0.
� Breakeven = X+c0 (call price/option price).
� Potential profit for long & potential loss for short is theoretically unlimited.
� ST > X at expiration ⇒ holder of call will exercise the option.
� For short max profit = C0.
� Long profit (loss) = short loss (profit) ⇒ zero sum game.
Call Option: Profit & Loss
� Maximum loss for buyer of put (long) = p0.
� Maximum gain for long = X-p0.
� Maximum gain for long = maximum loss for short.
� Breakeven = X-p0.
� Max gain for short = p0.
� Long profit (loss) = short loss (profit) ⇒ zero sum game.
� Underlying asset price � ⇒ buyer of put (long), seller of the call (short) ⇒ profit.
� Underlying asset price � ⇒ long call & short put ⇒ profit.
� Generally long put perceives asset price will � & short put perceives asset price will�.
Put Option: Profit & Loss
59.b
� Buy stock and sell (write) call option.
� Stock will be used for delivery.
� Assumption: stock price will not go up soon.
� Call premium received ⇒ increase income.
� Stock’s upside potential is traded against call premium.
� Upside potential (limited to) ⇒ X– So + c0.
� Maximum loss = So – c0.
Covered Call
� Buying a stock + buying a put (long).
� Investment management technique ⇒ protects a stock from � in value.
� Limited downside loss against unlimited upside gain.
� Breakeven = So + c0.
� Stock price > breakeven ⇒ profit
� Maximum loss = (So-X) + p0 paid.
� Maximum loss occurs when current price < X.
Protective Put
So = Stock Price at Time
Zero (Initial)
X = Strike/Exercise Price
OP = Option Premium