next lesson.
Suppose you're excited about NKLA and you don't think it will go down in value, but you don't think it will go over 45$ in the next 16 months....
you can buy 100 shares for 3125, and sell a 45$ jan 2022 call collateralizing the 100 shares for $1300
and
you can collateralize 3000$ to sell a 30$ jan 2022 put for $1600
This would return 2900$ in premiums on a 3125+3000 investment, and if the price closes at 50$ in January 2022 you will get 4500 for the sale of your stock, the 1300$ premium for the sale of the call option, the $3000 collateralized against the 30$ put option, and the 1600$ for the sale of the expired-worthless put option, against a total investment of 6125 (4500+1300+3000+1600 = 10400 max gain
or suppose the price of NKLA plummets to 20$, you would get the 1300$ for the sold call that expired-worthless, 1600$ for the sold put that expired $10 in the hole, 2000$ worth of your 100 newly bought shares that you paid 3000 for, and 2000 for the stock value of your 100 shares that are returned to you on an investment of 6125 (2000+1600+1300+2000 = 6900)
suppose the price plummet all the way to bankruptcy (0$)
you would gain 1600$ on the put option premium, 1300$ on the call option premium, and 200 shares in bankrupted and worthless stock. 6125 invested (1600+1300 returned = 2900
The only event in which you would come out "ahead" of said spread would be if 6125$ worth of stock now (196 shares at 31.25) grew more than 69.8% (price over $53.05) over the next 16 months because your maximum return on the spread is capped at 10400 with everywhere between a +33% gain and +69.8% netting you more profit on the spread than on the loss, plus you dont actually begin losing money on the spread until the stock falls below 16.13, because the intercept-point of the spread is (2x+1600+1300)-6125
aka
0=2x-6125+2900
2x = 3225
x=16.13 where X is the stock price on January 21, 2022.
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