Options Fundamentals: Strip Strategy

What is an Option:
It is a contract that gives the holder the right, but not the obligation, to buy an asset at a strike price, by a certain date. A “call” gives the holder the right to buy an asset while the “put” gives the holder the right to sell an asset at a predetermined strike price. And those who are involved in the market and trading of a contract are the buyers and sellers of the calls or puts.  Each contract is equivalent to one-hundred shares of a security.

Strip Strategy: 
The Strip would always require your put position to be at least double your call.  However, if you do increase your multiple in terms of leveraging your put-call position (i.e.: 3 -1), your profit would increase by a higher factor, while your protection through the call is minimized. Under this strategy, the investor would forecast a large decrease of the asset price for the underlying security. Therefore, if the underlying asset decreases in price, then the profit would increase by the larger multiple. However, if the underlying security price has a large increase, the trader would have some protection from the call position.

Variables:
·Vo = Initial Investment
·Vt = Current Portfolio Value
·π = Profit
·K = Strike Price
·St = Current Stock Price
·Co = Call Price per share
·CoQ = Call Share Quantity
·Po= Put Price per share
·PoQ = Put Share Quantity

Value of the Strategy:
·Vo = [(PoQ/CoQ)*Po] + Co
·If K >= St Then, Vt = [ (PoQ/CoQ) * (K-St) ]
·If K < St Then, Vt = St-K