LOS 37b (Level 3)

@Marc I haven’t revised this topic yet. But I feel more comfortable getting a gist of what exactly will help you breakeven, result in maximum profit, loss etc, rather than concentrating on the formulas and the confusing notations. I remember going through one of the Schweser lecture videos wherein they pointed out the same thing. Its more important to imbibe the general idea and get a feeling of what results in what, because in my opinion all those strategies have the same underlying, basic idea. Just concentrate on understanding the topic, rather than bothering with the exact formula and notations.

@Marc from what I remember, the questions around these normally are “Investor X suspects Situation A is going to happen. In order to profit, which of the following two should be combined?”

Followed by 3 combinations of derivatives (e.g. short call & short put, long put and short call, long call and long put) etc.

Then a follow on question may ask you what that particular configuration is called.

Basically the idea is you have to be clear which way should you lean in any situation in order to hedge your position sufficiently. The confusion will come from the combinations – at least that’s what the trouble always have been for me.

@marc, I think those questions are what you should expect. They are rare, but I have come across them before, and it is in the LOS so CFA would probably expect you to know this.

@Marc, most likely it’s an item set question. But hey, you never know!

@marc, the derivatives chapter always scare people off, especially when you read wordy LOS.

In fact, this section of derivatives require the least memory, as it’s all about logic. Whether it makes sense. All you need to know is the basic ‘hockey stick’ payoff chart for put and call options. That’s it.

The rest is just combinations of them. And the thing you only need to remember is the name (bull call spread etc) for those combinations.

Practice with drawing the charts, labelling the strike prices (x-axis), and payoff (y-axis). Take into account premium etc when doing this.

Don’t worry, if you have any questions, just start a new discussion thread on those, always best illustrated through examples.