In the lecture, we constructed a long straddle on AAPL as follows: one l...
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In the lecture, we constructed a long straddle on AAPL as follows:
- one long call with strike $170 at a premium of $8.94
- one long put with strike $170 at a premium of $10.52
Constructing the payoff table as instructed in Lecture 7, you can see that the breakeven points for this long straddle are $19.46 either side of $170 (that is, $150.54 and $189.46).
A long straddle is "neutral" to the direction of AAPL price movements. The slope of the payoff diagram is the same in the positive and negative directions.
In contrast, a long strip is also an option-trading strategy that profits from a big price movement in either direction, but the profits are larger for down movements.
To see this, apply the calculations of the payoff table as instructed in Lecture 7 on the following long strip:
- one long call with strike $170, with a premium of $8.94
- two long puts with strike $170, each with a premium of $10.52
what are the breakeven points for this long strip? That is, at what share price does the long strip have a zero net profit?
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