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In: Finance

Explain how to build a strip, what are the purposes of a strip strategy? Build a...

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.

Solutions

Expert Solution

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:

  • The strategy has unlimited profit while loss is restricted to the premium paid.
  • Since we are buying options this is a net debit strategy.
  • Profit -> Price of Underlying –Strike Price of Calls – Net Premium Paid
  • There are two breakeven points:

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


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