How is Maximum Risk Calculated?
Question: I am having difficulty understanding upside risk and downside risk in your super put lists and how it is calculated. Maybe you can explain it to me. I am obviously missing something. Answer: Downside risk is the Net Trade Debit (S+P-C) less the put strike, and assumes the stock sells off. The upside risk is the NTD less the call strike and assumes the stock moves up. The maximum risks are artificial numbers and do not include 1) any value in the put, in effect assuming that the writer exercises the put to sell the stock, nor 2) any trade management. It is unlikely that a trader would lose the entire sum paid for the put, but it is possible if the stock moved up quickly. A strong upward movement in the stock would seriously reduce the long put’s value, in which case the writer might get very little for the put or decide to keep it, getting no value for it. The maximum risk, then, is a theoretical measure of worst case, which a call writer would not often realize. But it is nic
