Say you have a group of option legs for a symbol either for a strategy like a vertical spread or maybe an iron condor. Each with different strikes, expiration dates, etc. Without identifying the type of strategy it is (because say it’s 5 random option legs that doesn’t conform to any strategy setup), is there a way to quickly determine if either the max loss or max profit is unlimited for the entire group of legs?
Modified 2 years, 7 months ago
Viewed 21 times
$\begingroup$ Condors and vertical spreads are limited gain and limited loss. You’ll find unlimited potential in backspreads, ratios, straddles and strangles. I suggest looking through the limited and unlimited profit potential strategies on The Options Guide and looking for commonalities: theoptionsguide.com/option-trading-strategies.aspx $\endgroup$– CasusBelliNov 8, 2020 at 4:26
$\begingroup$ Paul Samuelson invented a notation, not much used nowadays, which represents option payoffs by a two element vector. For example long a call is [0, 1] because you don't lose if the price goes down (first element = 0) and you make money (potentially to infinity) if the price goes up. Short a call is [0, -1], you lose when it goes up. Long the stock is [-1,1], etc.. Using this notation and summing together the vectors you can see the "behavior in the large" of P&L for any position. It would not be too difficult to write a program to do this. $\endgroup$– nbbo2Nov 8, 2020 at 12:56
$\begingroup$ @noob2 Very interesting, if you provide an example of this being used to broadly define the P/L of a couple different strategies like naked, vertical, covered, etc. as an answer, I’ll accept it as it would be sufficient to answer the question! $\endgroup$– user50810Nov 9, 2020 at 13:56
Add a comment |