Bear call spreads and Bear put spreads - breakeven

CFA Level III Derivatives
#1

Bear put spread breakeven: X2 - (p2 - p1)

Bear call spread breakeven: X1 - (p2 - p1)

Can someone confirm if this is correct?

*migraine…

#2

Correction: Bear call spread breakeven: X1 - (c2 - c1)

#3

Anyone? If this is incorrect please let me know, thanks

#4

Just know what each strategy is, and think of breakeven etc conceptually otherwise it’s too much memorization

#5

I just know what the payoff diagrams look like for each strategy. I can workout the breakeven prices from there by remembering that the slope for all the strategies are either equal to one or negative one.

It probably takes a bit longer than memorization but it’s a lot easier for me.

#6

no it will be st= xl+c2-c1

my guess is v0 is value instead of cost coz selling call with higher x is more valuable than low call

please correct me if i am wrong

#7

To obtain the profit, we must subtract the initial value of the position, which is V0 = c1 – 2c2 + c3. Is this value positive or negative? It turns out that it will always be positive. The bull spread we buy is more expensive than the bull spread we sell, because the lower exercise price on the bull spread we buy (X1) is lower than the lower exercise price on the bull spread we sell (X2). Because the underlying is more likely to move higher than X1 than to move higher than X2, the bull spread we buy is more expensive than the bull spread we sell.

(Institute 102)

Institute, CFA. 2015 CFA Level III Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. Wiley Global Finance, 2014-07-14. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

#8

Bull Call Spread

------ higher strike (sell) receive premium

------ lower strike (buy) pay premium

Bear Put Spread

------ higher strike (buy) pay premium

------ lower strike (sell) receive premium

The option you buy needs to be in the money by the amount of premium difference (receive less than pay) to break even.

#9

Right. This is the way I think as well.

Otherwise, too many complicated formulas to memorize

#10

This is the way to do it!!