Question

Assume you have been given $400,000 CAD with access to all listed stocks, bonds, futures, and options worldwide. You can trade in options and futures, in combination with the underlying asset. Assume today is Feb 1, 2020 and you have been given $400,000 CAD fake money to trade until April 20, 2020.

Perform a strip strategy. (involves a long call and two long puts with the same strike price and maturity)

Describe the trade and provide the reason for such trade.

Please provide table and or/ graph.

Answer 1

Solution:

Part A )

A strip strategy is an option strategy that involves the purchase one call option and two put options. The maturity of the options and strike price are the same.

We are taking an example of stock and strike price of 120 to create the strategy

Part B )

This strategy is useful when we think that the share price movement will be high and more likely the share price movement will be on lower side then this strategy will give better payoff as compared to straddle. It is similar to straddle but has one more put option in it.

Part C )

Here we are buying 120 strike call and put option and the graph os provided below