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Derivatives Theory

Options Breakeven Calculations

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Market Making Trainer ~8 min
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Overview
A classic trading interview question: you buy a block of calls or puts, hedge them to delta neutral in shares, and are asked where the stock has to trade at expiration for the whole position to break even. The trap is that the hedge does not disappear. On the option's side the option goes to a delta of one against your shares, so only the net delta works for you; on the other side the option expires worthless and only the hedge earns the premium back. Every run has different scenarios. You can expect questions about different topics, like the delta, how to hedge the delta-exposure, breakeven calculations on both sides and the worst-case loss. Pick calls, puts or a mix, and read the worked solution after every answer to learn from them.
Game Phases
1
Pick your options Choose calls, puts or a mix. That sets which side of the market the scenarios are built on, and which way the hedge goes.
2
Three scenarios Each scenario is a stock, a strike, a premium and a block of options, with a short chain of technical questions: delta, the share hedge, the worst-case loss and the breakeven on both sides. A worked solution follows every answer.
3
Review The run closes with a question-by-question review: your answer next to the right one, the scenario it belonged to and the full working, so you can see where a calculation went wrong.
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