How to calculate the payoff and profit of the strap combination strategy? Can you explain and...

How to calculate the payoff and profit of the strap combination strategy?

Can you explain and explain the calculation formula？

Expert Solution

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

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jeff jeffy answered 2 years ago

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