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:

 

 

 

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.

 

 

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