Question

Must use the following insituation to enter a Strip position

-Call Option 1 = Strike = $69.50, O-Price = $ 2.40

-Put Option 2 = Strike = $69.50, O-Price = $ 3.60

Which options are purchased and whichs ones are sold along with the breakeven point?

Answer 1

Solution:-

Strip position:-

In strip position we buy 1 in the money call option and buy 2 in the money put option. We do not sell anything in the strip position.

Hence we buy 1 call option at $2.40 and buy 2 put option at $3.60 each.

Hence the total premium paid = $2.40+2*$3.60 =$9.60

a)Upper Breakeven Point = Strike Price of Call/Puts + TotalPremium Paid

                                               = $69.50+$9.60=$79.10

b) Lower Breakeven Point = Strike Price of Call/Puts - (Net Premium Paid/2)

                                                =$69.50-$9.60/2

                                                =$64.70

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