In: Finance
Explain how to build a strip, what are the purposes of a strip strategy? Build a real life strip for an American stock of your choice, pull the options contracts and paste them on the answer. Please explain each part of it, what the credit or debit will be for the transaction, include every detail of each option contract you will use to build the strip trade.
The strip is not entirely a directionless strategy. You want to profit from volatility but at the same time have bullish or bearish view.
So a bearish strip would involve:
Buy 1 ATM Call
Buy 2 ATM Put
Characteristic s of Strategy:
Upper Breakeven= Strike Price of Calls or Puts + Net Premium Paid
Lower Breakeven=Strike Price of Calls or Puts – (Net Premium Paid/2)
Example:
To demonstrate Lets Take Apple 190 strike price call and put for July expiry. Apple is trading at 190.32. Apple Contract Size is 10.
1 190 ATM Call trading at $ 0.92. Therefore investment 0.92*10= $ 9.2
2 190 ATM Put trading at $ 0.01= Therefore investment 2*0.01*10=$ 2
Therefore, total investment is 9.2+2= $ 11.2 (which can be your maximum loss)
Breakeven Point-
Upper= 190+11.2= $ 201.2
Lower = 190 – (11.2)/2= $ 184.40