The Complete Options Trader by Michael C. Thomsett

Author:Michael C. Thomsett
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

To see a table showing outcomes at various price levels, link on strap at the website https://​thomsettsguide.​com/​options-strategies/​

Strip – a bearish variation on the long straddle, in which more long puts are opened than long calls. As the opposite of the strap, profit will occur more rapidly if the underlying price moves downward; however, profits will result in two ways: when the underlying price moves far enough above or below the debit.

Example: You create a strip on an underlying priced at $93.69. You buy one 90 call for 5.90 and two 90 puts for 1.85 each, or a total of 3.70. Your total debit is 9.60.

Maximum profit is unlimited and is found both above and below the strike. However, based on the size of the total debit, considerable movement in the underlying price is required. On the downside, maximum profit is equal to the strike, minus the price of the underlying, with the net divided by two; less the net premium paid. For example, if the underlying price declines to $82 per share, profit is: (((90 − 82) × 2) − 9.60 = 6.40, or $640). On the upside, profit is equal to the underlying price minus the strike, minus the net debit. For example, if the underlying rises to $100 per share, profit is: (100 − 90 − 9.60 = 0.40, or $40).

Breakeven takes place at two price points. On the downside, it equals the strike minus one-half of the debit paid: (90 − (9.60 ÷ 2) = 85.20, or $85.20). Upper breakeven is located at the strike plus net debit: (90 + 9.60 = 99.60).

Maximum loss is limited to the net debit paid: 9.60, or $960.

The outcomes based on this example are shown in Fig. 51.

Fig. 51 Strip

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