Series 7 Exam For Dummies by Rice Steven M

Author:Rice, Steven M. [Rice, Steven M.]
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-12-02T22:00:00+00:00

You end up with more Money In than Money Out; therefore, the investor’s maximum potential gain is $700 ($800 in minus $100 out).

To help you recognize a spread, notice that when you put the two premiums in the options chart, they are spread apart (one on either side).

2. Find the maximum loss.

You already calculated the maximum gain, so next you need to exercise both options to get the maximum loss. When exercising put options, enter the strike prices (multiplied by 100 shares) on the opposite side of the chart from their premiums because puts switch (go on the opposite side of the chart from the premium). First, exercise the 30 put and enter $3,000 (30 × 100 shares per option) in the Money In side of the chart, which is opposite from the $100 premium. Next, exercise the 40 put and enter $4,000 (40 × 100 shares per option) in the Money Out side of the options chart, which is opposite its $800 premium. Total up the two sides, and you see that the maximum potential loss is $300 ($4,100 out minus $3,800 in).

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