标题: 2012 mock q 44 and q43 [打印本页] 作者: stalkey 时间: 2013-4-22 10:16 标题: 2012 mock q 44 and q43
q44 The butterfly has a negative cost, it brings in cash, which should not hold in the market
the bull spread with calls we are buying starts paying sooner than the bull spread with calls we are selling, it thus should cost more and we should have to pay a cash at the start
Under the given prices you can buy a bull with calls that starts paying at 1100 and stops at 1125 for a cost of 15.35
You can buy a bull with calls that starts paying at 1125 and stops as 1150 for 15.8
no one would pay more for a bull spread that starts paying at a higher price than one that starts paying at a lower price esp that the max gain of both is the same =25
also the question sais using exhibit 1 and does not specify to use calls, you could purchase a high put, sell 2 puts at a lower price, the purchase a put at an even lower price, and that would be a butterfly spread
q43 the say a covered call does not reduce exposure, page 407 in CFAI said they do.作者: stockjaguar 时间: 2013-4-22 10:17
I agree about #43. It has to be a mistake.作者: jcole21 时间: 2013-4-22 10:17
I agree as well with respect to Question #43. Only thing I can think of is that it said “provide protection against losses,” instead of “provide some protection against losses.” This wasn’t on the mock errata, right? So what’s the best way to think about covered calls and downside protection – only that the premium buffers your losses somewhat, but they can trick you with wording, just like here.作者: ftwcfa 时间: 2013-4-22 10:18
Question 44 applying the multiplier to the payoff less the premium seems incorrect. You don’t apply the multiplier to the cost of the options agreed?作者: andytrader 时间: 2013-4-22 10:18
Agreed on #44, that was a terrible question by the CFAI. You can do a butterfly spread with either calls or puts and it does not specify which one. Also the max loss on the butterfly call spread would be = a $45 gain. So worst case scenario on this transaction you make $45 and best case you make $2,545…seems like a pretty good deal.
I also paused on #43 because I remembered reading in the text that covered calls offer some downside protection. I think that is a mistake in the text. Nobody in reality is selling covered calls for downside protection, sure your losses would be reduced by the amount of premium income from selling the calls but that is likely to be very small compared to the drop in stock price if their is a big move downward.
Hopefully they can manage to keep inconsistent questions like these off of the acutal exam.
Croker - Yes you do apply the multiplier to the cost of options. Although I think the multiplier should say “100 contracts and not $100”. By saying the multiplier is $100 it is implying that the exercise price is $1,100 X $100 = $110,000 IMO.作者: johnnyBuz 时间: 2013-4-22 10:19
I agree covered calls provide some downside protection as you get the premium. It’s not massive , but still some protection. I think there was a question in the book which had this.作者: disiz64 时间: 2013-4-22 10:19
look at diagram for covered call, the downside is very large作者: defour44 时间: 2013-4-22 10:20
For 43, I thought of it as the covered call is more an income generator than downside protector. I had A, then changed to B.作者: wake2000 时间: 2013-4-22 10:20
it’s really not accurate to say writing covered calls provides downside protection. maybe you say it lowers your implied cost basis, but having been on the floor of the CBOE, traded options for almost 20 years in my PA since i was a teenager, and worked at 3 different hedge funds where options were employed, it’s not appropriate to say it provides “downside protection”. cuz it just doesn’t. it’s an income generator and it lowers your cost basis.作者: justin88 时间: 2013-4-22 10:21
I absolutely agree with you in theory, but technically (and for test purposes), downside protection doesn’t necessarily mean FULL downside protection.作者: KungFuPanda 时间: 2013-4-22 10:21
prophets wrote:
it’s really not accurate to say writing covered calls provides downside protection. maybe you say it lowers your implied cost basis, but having been on the floor of the CBOE, traded options for almost 20 years in my PA since i was a teenager, and worked at 3 different hedge funds where options were employed, it’s not appropriate to say it provides “downside protection”. cuz it just doesn’t. it’s an income generator and it lowers your cost basis.
100% correct. If you engage in a covered call you aren’t betting on the market going down (at least very much). You do it largely because you don’t think the market is going anywhere, and the call serves as additional income in the meantime. If the market goes up you can close out the position.
We’ve never used or thought of a covered call strategy as protection.作者: adehbone 时间: 2013-4-22 10:22
Book seems to indicate otherwise.
selling a call + holding the underlying - is less risky than selling a naked call. By virtue of willingness to bear some risk - returns are also reduced. So a covered call by that definition has lower downside as well as lower upside.
Quote:
Pg 407-408
Because of the importance and widespread use of covered calls, it is worth- while to discuss this strategy briefly to dispel some misunderstandings. First of all, some investors who do not believe in using options fail to see that selling a call on a position in the underlying reduces the risk of that position. Options do not automatically increase risk. The option part of this strategy alone, viewed in iso- lation, seems an extremely risky strategy. We noted in Section 2.1.1 that selling a call without owning the stock exposes the investor to unlimited loss potential. But selling a covered call—adding a short call to a long position in a stock— reduces the overall risk. Thus, any investor who holds a stock cannot say he is too conservative to use options.
Following on that theme, however, one should also view selling a covered call as a strategy that reduces not only the risk but also the expected return compared with simply holding the underlying. Hence, one should not expect to make a lot of money writing calls on the underlying. It should be apparent that in fact the covered call writer could miss out on significant gains in a strong bull market. The compensation for this willingness to give up potential upside gains, however, is that in a bear market the losses on the underlying will be cushioned by the option premium.
It may be disconcerting to some investors to look at the profit profile of a covered call. The immediate response is to think that no one in their right mind would invest in a strategy that has significant downside risk but a limited upside. Just owning the underlying has significant downside risk, but at least there is an upside. But it is important to note that the visual depiction of the strategy, as in Exhibit 6, does not tell the whole story. It says nothing about the likelihood of certain outcomes occurring.作者: maxmeomeo 时间: 2013-4-22 10:22
I got #43 wrong as well…my logic was: if you buy the stock at $10 and it goes up to $50 and you sell a deep-ITM call at a $25 strike, and the price at expiration is $43, then you deliver the stock and receive $25 per share, which equates to a $15 gain plus the call premium (so effectively locking in a minimum value for the stock as long as the call you’re selling expires in the money and is above your desired gain). However, this strategy completely blows up if the stock tanks and the call expires worthless - so in retrospect I no longer think that the covered call offers any actual downside protection.作者: Bad5shah 时间: 2013-4-22 10:23
cpk123 wrote:
Book seems to indicate otherwise.
selling a call + holding the underlying - is less risky than selling a naked call. By virtue of willingness to bear some risk - returns are also reduced. So a covered call by that definition has lower downside as well as lower upside.
first of all almost anything is going to be less risky than selling naked calls or puts. that’s just inherent in the contract. if i write naked insurance policies on natural disasters it’s going to be a lot more risky than if i go out and get reinsurance from a major reinsurer like lloyds of london or berkshire to back up what i’m writing.
you can quote whatever crap you want from the book and hope that some academic trash reading from CFAI will approve of your viewpoint. but CFAI even confuses volatility - a pricing component of the option premium with volatility of the stock price itself (movement of underlying). it’s really a joke. put that on top of the fact that CFAI has some hard-on for butterfly trades while completely ignoring strangles and other more common trades, makes it all the more comical. it really is one of the worst written sections in all of the curriculum and any basic options book by james bittman or lawrence macmillan would put it to shame.
covered calls are an income generating tactic and help lower your cost basis. plain and simple. CFAI even have an EOC question with 4 people who have varying market outlooks and various strategies assigned, that verify this viewpoint. market going nowhere and you want to generate some income? write calls.作者: yuoska 时间: 2013-4-22 10:23
I’m not as well versed as prophets in options trading (by reading his posts), but I have quite a bit of exposure, both on a personal level and a PM side. He’s dead on. I’ve heard of butterfuly trades, but have never implemented one. Maybe others do, but straddles and strangles are very common. Personally speaking, my “fun money” is usually employed in options trading, either through outright long put/call positions or straddles. Covered calls, collars, protective puts - all commonly used in PM.作者: PieMan 时间: 2013-4-22 10:24
diagram says it all boys and girls…ain’t much protection on the down side when you look at that bad boy作者: islandgyrl 时间: 2013-4-22 10:24
They aren’t saying there is much, they are saying there is protection (even if it is minimal). On the test, merely say it has a minimal amount of protection on the downside in the free response section, or look to see if there is a better answer in the multiple choice section. Then move on. There are bigger fish to fry in the last 4 days of study.作者: koba 时间: 2013-4-22 10:25
Poorly worded question imo. Covered call provides a small amount of downside protection equal to call premium, i.e. the stock could go down by x% and you won’t lose if the premium is x%.
