Strip - Buy TWO Strike Puts, Buy ONE Strike Call.
- An adjustment strategy to Straddle , buying one more Put..
Strategies...
- Buy TWO Strike Puts (ATM)
- Buy ONE Strike Call (ATM) with same expiration.
- Strip is more expensive than straddle,only do strip when there is a big jump in stock price.
- Make profit with stock price moving in either direction, preferably to the downward movement.
- Limited downside risk, uncapped upside potential profit.
Example...
AT&T Inc. (NYSE:T) is traded at $34.10 on May, 2012. To do a Strip, you
- Buy ONE Aug 2012 $34 Call at $0.80.
- Buy TWO Aug 2012 $34 Put at $1.20.
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| Long Strip |
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| Long Strip |
- Profit from volatile stock's movement, preferably downside
- Uncapped potential profit
Disadvantages...
- Expensive - Buy TWO Puts & ONE Call (ATM)
- Significant movement of stock to cover all costs.
- Time decay accelerates as options close to expiration.
Maximum Profit : Uncapped Profit
Maximum Loss : $0.80 + $1.20 + $1.20 = $3.20
(Call Premium + Two Put Premium)
Breakeven Up : $34.00 + $3.20 = $37.20
(Strike Price + Premium Paid)
Breakeven Down : $34.00 - $1.60 = $30.80
(Strike Price - Premium Paid/2)
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