← Strategy LabLesson 26 · 4:09
Strip
Summary
Use a strip when you expect a big move and think down is more likely than up. You buy one $100 call for $345 and two $100 puts for $682, paying $1,027, which is the most you can lose if XYZ ends right at $100. Below $100 you make $200 for each dollar XYZ falls until it reaches zero, above there is no limit at $100 a dollar, and you break even at $94.86 on the way down or $110.27 on the way up.
Key terms
- strip
- A set of out-of-the-money puts and calls at every strike, each weighted by one over the strike squared, that together build a variance swap.
- lopsided V
- A last-day line where one arm climbs twice as fast as the other, because one side has two options.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- volatility
- The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.
- break-even on either side
Check yourself
Answer each question to see why the right answer is right.
1. What does this strip cost in all?
2. XYZ ends at $110 on the last day. What is your result?
3. XYZ ends at $90 on the last day. What is your result?
4. Where is the strip's break-even on the way down?
5. XYZ is at $95 and days pass with nothing else changing. What happens to your result?
Finished the video and the quiz? .