22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
EXHIBIT 11.1 Bed Bath & Beyond January–February 57.50 calendar.
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The only point on the diagram that is drawn with definitive accuracy is
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the maximum loss to the downside at expiration of the January call. The
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maximum loss if Bed Bath & Beyond falls low enough is 0.80—the debit
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paid for the spread. If Bed Bath & Beyond is below $57.50 at January
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expiration, the January 57.50 call expires worthless, and the February 57.50
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call may or may not have residual value. If Bed Bath & Beyond declines
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enough, the February 57.50 call can lose all of its value, even with residual
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time until expiration. If the stock falls enough, the entire 0.80 debit would
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be a loss.
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If Bed Bath & Beyond is above $57.50 at January expiration, the January
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57.50 call will be trading at parity. It will be a negative-100-delta option,
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imitating short stock. If Bed Bath & Beyond is trading high enough, the
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February 57.50 call will become a positive-100-delta option trading at
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parity plus the interest calculated on the strike. The February deep-in-the-
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money option would imitate long stock. At a 2 percent interest rate, interest
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on the 57.50 strike is about 0.17. Therefore, Richard would essentially have
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a short stock position from $57.50 from the January 57.50 call and would
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be essentially long stock from $57.50 plus 0.28 from the February call. The
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maximum loss to the upside is about 0.63 (0.80 − 0.17).
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The maximum loss if Bed Bath & Beyond is trading over $57.50 at
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expiration is only an estimate that assumes there is no time value and that |