Options Strategies

Strategy Number 14 - Long "Strip"


Market dATA
DJ Index 100 points
Prices
Call 100 $1,000

Put 100 $1,000

Strategy name:

Long "Strip".

 

Recommended use of strategy

Expectation of volatile index but with a greater change of a decrease. Returning to the example of the elections, we forecast a higher probability of Y being expected President -- driving down the index.

 

Strategy components

Buying 2 Put options of identical strike price.

Buying one Call option with the same strike price.

For example: Buying 2 Put 100 options and one Call 100 option.

 

Expenses / Income from building the strategy

Expenditure of $3,000

Strategy graph:

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Auxiliary table for building the profit line

 

 

DJ Index
(Horizontal axis)
(Fixed expenses)/ fixed income Variable income
(Call contribution)
Variable income
(Putl contribution)
Total profit / (loss) 
(Vertical axis)
2+3+4
1 2 3 4 5
50 ($3,000) --- $10,000 $7,000
60 ($3,000) --- $8,000 $5,000
70 ($3,000) --- $6,000 $3,000
80 ($3,000) --- $4,000 $1,000
90 ($3,000) --- $4,000 ($1,000)
100 ($3,000) --- --- ($3,000)
110 ($3,000) $1,000 --- ($2,000)
120 ($3,000) $2,000 --- ($1,000)
130 ($3,000) $3,000 --- $0
140 ($3,000) $4,000 --- $1,000
150 ($3,000) $5,000 --- $2,000

 

Strategy analysis:

The strategy analysis is similar to that of the Long "Straddle".

Source of Profit       

We profit when there is a change in the index.

When the index goes up, we profit on the call option.

When the index goes down we profit on the 2 Put options.

The profit is greater if the index falls.

Source of loss

The loss derives from buying the strategy and decreases when a change occurs in the DJ Index and we start to make a profit.

Break-even point     

When the profit from the Call option or from the 2 Put options covers the cost of purchase, $3,000. This occurs when the index is at 130 points or 85 points.


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In this case we use a strategy similar to the "Strip", known as a "Strap" (the next strategy).

Strategy Number 14 - Long "Strip"543Strategy Number 14 - Long "Strip"