In: Finance
How to calculate the payoff and profit of the strap combination strategy?
Can you explain and explain the calculation formula?
Long strap is formed by buying 2 calls and 1 put option at the same strike price.
Example: Buy 2 Calls at $160 by paying premium of $7 each
Buy one Put at $160 by paying premium of $6
Total premium paid = 2 * 7 + 6 = $20
The payoff of this position = 2 * max(St - X, 0) + max(X - St)
The payoff = 2 * max(St - 160, 0) + max(160 - St)
The profit of this position = The payoff - Total premium paid
The profit = 2 * max(St - 160, 0) + max(160 - St) - 20
Screenshot with formulas