Strategy Number 14 – Long “Strip”

Market dATA
DJ Index100 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 incomeVariable income
(Call contribution)
Variable income
(Putl contribution)
Total profit / (loss) 
(Vertical axis)
2+3+4
12345
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).